Barron’s warns savvy investors that prices of “value stocks,” the current stock market’s cheapest, are so low they are poised to start rising again.
“The wild selloff in 2018 might have provided the reset value stocks need,” the financial newspaper recently advised. Value stocks are commonly defined as shares of a company with solid fundamentals that are priced below those of its peers, based on analysis of price/earnings ratio, yield, and other factors.
“While most stocks have suffered, they have not suffered equally. Within the S&P 500, the valuation gap between the cheapest stocks and the most expensive stocks—known as the “valuation dispersion ratio”—has hit its highest level since the 2008 financial crisis, meaning cheap stocks are trading at deep discounts even relative to their own history,” the report said.
To be sure, historical data over the past two decades suggest that the performance of cheaper stocks tends to move in the opposite direction of the valuation dispersion ratio, according to Bank of America Merrill Lynch strategist Savita Subramanian.
And currently the dispersion ratio is far above its historical median. If a reversion to the mean were to start, dispersion will narrow and value stocks would likely outperform going forward, Subramanian writes.
A trend of investors embracing value stocks just may reflect part of a sea-change in investing trends.
To be sure, one undeniable fact has underpinned the latest leg of the long-running U.S. bull market: Paying up for "growth stocks" at any price paid off, hugely.
A "growth stock" is commonly defined as shares of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry.
Paying a premium for shares of fast-growing companies like Amazon Inc. (AMZN.O) and Google parent Alphabet Inc. (GOOGL.O) over those viewed as good value for the money has been a recipe for success for more than five years. Growth stocks have beaten their value rivals by a margin of more than two-for-one in that span until just recently, Reuters explained.
Even with the recent downturn, growth stocks remain expensive on a forward price-to-earnings ratio basis, making the argument for value stocks more persuasive given investor concerns that have fueled the sell-off, Reuters reported.
Steve DeSanctis, equity strategist at Jefferies in New York, said there are sound reasons to own value stocks now. “We are starting to see earnings accelerate faster for value than for growth, and if GDP is going to be north of 3 percent, we should see a pretty good earnings backdrop,” DeSanctis told Reuters.
Common value stocks include names such as JPMorgan Chase (JPM.N), Exxon Mobil (XOM.N) and Johnson & Johnson (JNJ.N), Reuters explained.
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