James K. Glassman – Kiplinger’s Personal Finance
Kiplinger’s Money Power
A little over a year ago, I wrote that value stocks were coming back. After trailing growth stocks badly for more than a decade, value beat growth in 2022 and appeared in the ascendancy. But I jumped the gun.
Over the past 12 months, the S&P 500 Value index performed well, but the S&P 500 Growth index did far better.
I am not giving up. Of course, timing the market is impossible, but value and growth move in cycles, and there’s a good case that it is finally value’s turn again.
Value stocks are those out of favor with investors, as evidenced by lower valuations. Usually, that means profit growth may be consistent but far from spectacular.
Value led growth in the 1980s, and growth dominated in the 1990s. With the collapse of the tech bubble in 2000, value gained the upper hand for seven years, then passed the torch back to growth. Over the past decade, the S&P Growth index beat the Value index by an average of more than five points per year.
BofA Securities issued a report in June that stated, “After two decades of steady underperformance, U.S. value may outperform growth again.”
The impending rebirth of value, they wrote, makes sense either in the bull case (with the earnings of value stocks in long-neglected sectors playing catch-up) or in the bear case (with tech revenues hurt by a “hard landing” after the current round of Federal Reserve rate hikes and value stocks doing comparatively better than growth stocks falling from a greater height).
I have two other arguments for value. The first is an instinct that it’s time for a change. Growth has been king for nearly two decades. That’s enough. Trees don’t grow to the moon. My second argument is far more convincing. It is that over the longer term, value has beaten growth handily, and there is no reason this trend won’t continue.
Why does value beat growth? Because cheap beats expensive. Investors often shun value stocks because they get bored with steady performance and need excitement. Value stocks thus get “mispriced” on the low side, just as growth stocks get bid up beyond their true worth.
Because stocks often shift between value and growth categories, the best way to invest in value is through an exchange-traded fund linked to an index. The best choices are iShares S&P Value ETF (symbol IVE) and Vanguard S&P 500 Value (VOOV). For a portfolio that includes smaller stocks and has an even lower proportion of tech shares, consider iShares Russell 1000 Value (IWD) and Vanguard Russell 1000 Value (VONV).
In its recent deep dive on value, BofA recommended three sectors as especially attractive: utilities, energy and banks.
You can buy utility stocks through ETFs such as Utilities Select Sector SPDR (XLU) and Fidelity MSCI Utilities Index (FUTY); energy through Energy Select Sector SPDR (XLE) and Van Eck Oil Services (OIH); and banks through Invesco KBW Bank (KBWB) and SPDR S&P Bank (KBE).
Just remember that value investing requires conviction and a long-time horizon.
(James K. Glassman is a contributing editor at Kiplinger Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
Photo: ashu013sharma, pxhere.
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