Value Investors Bet On Market Leadership

Value Investors Bet On Market Leadership

There aren’t many corners of the stock market that haven’t been hit by the massive selloffs this year, but value shares seem to be holding up better than most, according to an article in The Wall Street Journal. Slower-growing businesses such as Exxon Mobile Corp, Merck & Co., and Molson Coors Beverage Co. are leading the pack, with double-digit returns in the face of the S&P 500’s 18% loss. On the flip side, the tech giants that dominated the market over the past 10 years have had a steep slide as the Fed tightens monetary policy in an effort to combat inflation.

In a recent interview, both Cliff Asness of AQR Capital Management and Rob Arnott of Research Affiliates told The Journal that value stocks are still very inexpensive compared to growth stocks, even with their gain in popularity. Bolstered by those low prices, Asness believes value will have solid performance over the next 3-5 years and has already been weighting AQR more towards value stocks, even since 2019. Meanwhile, Arnott posits that value stocks could be in the beginning stages of outperforming growth for a long time, though he said that he reserves “the right to moderate that view.”

Various measures are used to determine whether a stock is cheap or expensive. One value index, the Russell 1000 Value, was trading at 14.3 times its estimated earnings for the next year, compared to its growth counterpart at 22.5 times projected earnings, according to BofA Global Research data cited in the article. That means that the value index had a price-to-earnings ratio of 63% of the growth index’s ratio, leading to a what Arnott says is a “snapback” that is “powerful and fast…this year.” This new leadership of value stocks has shifted the power dynamics that have been in place in the stock market for years; fueled by investor’s money gained by promises of rapid expansion, growth has outrun value for most of the last decade. And the start of the pandemic in 2020 was especially damaging for value as investors poured money into digital companies.

But now, as the Fed raises rates that eat into the future earnings that growth companies promise their investors, the Russell 1000 Growth Index has fallen 25% so far in 2022, compared to the Russell 1000 Value index which is down 12%. Some of the growth index’s biggest names are driving the decline: Meta, Nvidia, and Amazon, down 49%, 42% and 30% respectively. But value indexes are being bolstered by energy stocks—the only S&P 500 sector generating positive returns this year. Exxon and Chevron are up 42% and 23% respectively and got a confidence boost from Warren Buffett, a longtime value investor who bought up shares of Occidental and Chevron earlier this year.

But while both Arnott and Asness are vocal about their confidence in value and the moment its currently having, neither of them are inclined to boast as it’s impossible to say how well value will perform or for how long. “I…believe the time to gloat in this business is after you’re retired or dead,” Asness told The Journal.