After a lengthy period of underperformance, value stocks have started to rebound. And in a recent piece for Proactive Advisor, Validea CEO John P. Reese says they are now poised to outperform their pricier growth stock counterparts.
Reese talks about some of the reasons value stocks have struggled over the past decade, saying that investors have been incredibly risk-averse in the aftermath of the financial crisis and Great Recession and thus very hesitant to buy value stocks, which usually have some sort of cloud hanging over them. The rise of index funds, most of which are market-capitalization weighted and thus overweight overvalued stocks, has also created a cycle in which pricey stocks get pricier and pricier, he says.
But growth’s dominance over the past decade has made value stocks even cheaper than usual – and thus poised to outperform, Reese says. He notes that since 1998, the S&P value index’s earnings yield has on average been 1.4 percentage points higher than the S&P growth index’s earnings yield, according to Bloomberg. The gap has recently been more than 2%, “meaning value stocks are offering more value than usual.” Reese discusses how the earnings yield gap between growth and value historically has been a pretty good indicator of which style will have better future performance.
Reese says it’s too soon to say whether the value’s recent bounce-back signals a new turn in the growth/value cycle. But it “is encouraging for those value investors who have hung in and stayed disciplined,” he says. “Based on our analysis of historical value-stock returns, once the turn does take place, we expect a prolonged and significant reversion to the mean in which value stocks outperform growth names.”
Reese takes a look at some of his value-focused “Guru Strategies,” which are based on the approaches of Benjamin Graham, Warren Buffett, and other highly successful investors. Several of these value strategies are off to strong starts in 2016, including his Joseph Piotroski-based approach, which is beating the S&P 500 by more than 20% this year.