Value stocks are “poised to generate some of their best returns in a quarter-century,” says QMA CEO Andrew Dyson (QMA is the quantitative arm of PGIM). This according to a recent article in Barron’s.
Noting the ongoing debate on Wall Street regarding whether the recent value rebound is a short-term shift or the beginning of a sustainable comeback, the article says that in a research report Dyson argued that recent earnings and earnings expectations for the most attractively priced stocks have held up better than usual, but that the market has been “less willing to reward them.” This, he believes, signals mispricing due to investor overreaction rather than suggesting value stocks are in a “trap.” He notes further that when value dispersion—the gap between the market’s cheapest and most expensive stocks—has been this wide in the past, “a sharp reversal of value outperformance followed.”
Although growth stocks have enjoyed a decade of gains, Dyson believes that investor expectations for continued growth have lifted the group to extremely high valuations and wrote, “The market is chasing what could best be described as speculative growth.”
A reacceleration of global growth or a recession, says Dyson, would serve as catalysts for a value-growth reversal. He adds that a tighter regulatory environment should also trigger more competition for some growth stocks: “A rebound in value could stem from something as simple as a single growth stock having a significant earnings miss, leading investors to re-evaluate the whole space.”
The article reports that Dyson advises investors to prepare for a widespread reawakening in the value space, although it’s tough to know when it will occur. Trying to time a correction could be costly if done poorly. He suggests that a better approach might be to increase exposure to value now to benefit from an impending rally.