Mr. Market: Take A Second Bite At Value Stocks

Mr. Market: Take A Second Bite At Value Stocks

Opportunity may be knocking once again with value stocks, John Authers writes in an opinion piece for Bloomberg, in which he draws on Rob Arnott’s recent research paper called “Did I Miss The Value Turn?”

Taking the traditional definition of value as just buying the stocks with the lowest price-to-book multiples, value has wildly underperformed growth in recent years and continues to sag in the U.S., Japan and Europe even after a rally late last year. So why should we believe that this is a good time to buy?

Arnott’s argument is to look at valuation, and using that definition value looks better than growth. It has also rebounded quicker after times of financial crisis. But it hasn’t bounced back as readily this time, and so its relative valuation is extraordinarily cheap. Buying a value stock at a deep discount gives you greater opportunity to profit as they rebound.

The hotel and airline sectors provides a good example of a second bite at value stocks. After an impressive recovery earlier this year, the delta variant caused a renewed slide, making many of these stocks dirt cheap. As the travel industry begins to recover again, this second opportunity may not last long.

With a spate of recent central bank meetings and the looming possibility that more central banks will raise interest rates, as well as the sharp rise in bond yields in late September, it’s important to note that there is a solid relationship between the strength of the economy—and with it the steepness of the yield curve—and the relative performance of value. At a time when so many assets look badly overvalued, a shift to value stocks may work in the medium term.