How To Make Money When Value Investing Comes Back
Value investing has lagged behind growth investing for years now, but that won’t always be the case. A change is coming. Although we don’t know when it will happen, we can be confident it will. Smart investors should get ready for this.
Super-investor Warren Buffett, longtime champion of value investing. Photographer: Christopher Goodney/Bloomberg
Why will value re-take the lead? One reason is that investing runs in cycles of seven to 10 years. Growth has trounced value since the financial crisis, which began almost 10 years ago. Right now, thanks to the popularity of tech stocks, growth shows no signs of flagging. For the first nine months of 2017, the Standard & Poor’s Growth Index was up 19% and its value counterpart, just 8.5%. In October, the gap has remained about the same.
Growth investing focuses on stocks that have superior capital appreciation, meaning their stock price is rising. The most prominent lately are the so-called FAANG stocks (Facebook, Apple, Amazon. Netflix and Google parent Alphabet). This year, they have outpaced the market smartly, with gains ranging from 53% (Apple) to 23% (Google), versus just under 15% for the S&P 500.
Value investing, on the other hand, looks for cheaper stocks that the market has overlooked, but that have the potential to rise once people wake up to their true worth. The financial and industrial sectors harbor a lot of them.
These days, the high-flying, growth-centric market makes many believe that a growth style will always be in vogue. Goldman Sachs in June issued a report asking whether value was dead. While Goldman didn’t conclude that this was true, the mere fact that the firm raised the question indicates investors’ mindset now.
History shows, however, that a value investing style pays off more over the long run. Since 1926, value stocks have returned 17% yearly on average, compared to just 12.6% for growth, according to a Bank of America/Merrill Lynch study last year. Jim Cramer, the CNBC commentator, says there’s no reason that JPMorgan Chase and Citigroup should trade at a discount.
What will cause the switch to value and away from growth? In all likelihood, three factors will be the catalyst:
Reversion to the mean. That’s the tendency of high-fliers to fall back to average growth. Once upon a time, IBM was the hot tech stock. That’s not so anymore, as Big Blue struggles with dipping revenues. Over the last five years, the stock has lost 27%. IBM used to consistently beat the market, but no longer.
In the late 1990s, the conventional wisdom held that burgeoning tech stocks would keep on heading for the sky. After all, they were the future. Sound familiar? While tech in general certainly was the future, that didn’t mean every tech stock was golden. A lot of the dot-com darlings crashed once investors realized that they had no earnings and very little chance of making any.
More economic growth and a weaker dollar. The overall economy has had sluggish growth for some time, at around 2%, which is not good news for industrial companies. But gross domestic product expansion topped 3% in the second quarter. The third quarter GDP may be held back because of the fierce storms that battered Texas, Florida and Puerto Rico. The trend, though, seems to be upward.
Meanwhile, there’s an additional boost for industrials: The dollar has slumped for most of this year, reversing a rally after Donald Trump’s election last November. The president’s inability to pass his legislative agenda, at least so far, has weighed on the greenback. So has higher economic growth in Europe and elsewhere, which has helped foreign currencies at the dollar’s expense.
The result is that U.S. goods are cheaper overseas, which is a boon for American manufacturing.
Higher interest rates. The Federal Reserve appears committed to hiking rates, with the next step up expected at its December meeting. This trend is very helpful to the banks, which have suffered in an era of low rates. The main way banks make money is by gathering deposits and lending them out at a higher rate. But when their lending-out rate is lower, their earnings get squeezed.
This so-called spread should widen as rates ratchet up. Then maybe Cramer won’t need to complain that JP Morgan and Citi are under-valued.
">Now is the heyday for growth stocks, with big-name tech goliaths spiraling ever upward. Well, nothing in the market lasts forever. The ever-wise John Maloney, chief executive of M&R Capital Management in New York, tells us why value investing will stage a comeback, and how to profit from it.
Value investing has lagged behind growth investing for years now, but that won’t always be the case. A change is coming. Although we don’t know when it will happen, we can be confident it will. Smart investors should get ready for this.
Super-investor Warren Buffett, longtime champion of value investing. Photographer: Christopher Goodney/Bloomberg
Why will value re-take the lead? One reason is that investing runs in cycles of seven to 10 years. Growth has trounced value since the financial crisis, which began almost 10 years ago. Right now, thanks to the popularity of tech stocks, growth shows no signs of flagging. For the first nine months of 2017, the Standard & Poor’s Growth Index was up 19% and its value counterpart, just 8.5%. In October, the gap has remained about the same.
Growth investing focuses on stocks that have superior capital appreciation, meaning their stock price is rising. The most prominent lately are the so-called FAANG stocks (Facebook, Apple, Amazon. Netflix and Google parent Alphabet). This year, they have outpaced the market smartly, with gains ranging from 53% (Apple) to 23% (Google), versus just under 15% for the S&P 500.
Value investing, on the other hand, looks for cheaper stocks that the market has overlooked, but that have the potential to rise once people wake up to their true worth. The financial and industrial sectors harbor a lot of them.
These days, the high-flying, growth-centric market makes many believe that a growth style will always be in vogue. Goldman Sachs in June issued a report asking whether value was dead. While Goldman didn’t conclude that this was true, the mere fact that the firm raised the question indicates investors’ mindset now.
History shows, however, that a value investing style pays off more over the long run. Since 1926, value stocks have returned 17% yearly on average, compared to just 12.6% for growth, according to a Bank of America/Merrill Lynch study last year. Jim Cramer, the CNBC commentator, says there’s no reason that JPMorgan Chase and Citigroup should trade at a discount.
What will cause the switch to value and away from growth? In all likelihood, three factors will be the catalyst:
Reversion to the mean. That’s the tendency of high-fliers to fall back to average growth. Once upon a time, IBM was the hot tech stock. That’s not so anymore, as Big Blue struggles with dipping revenues. Over the last five years, the stock has lost 27%. IBM used to consistently beat the market, but no longer.
In the late 1990s, the conventional wisdom held that burgeoning tech stocks would keep on heading for the sky. After all, they were the future. Sound familiar? While tech in general certainly was the future, that didn’t mean every tech stock was golden. A lot of the dot-com darlings crashed once investors realized that they had no earnings and very little chance of making any.
More economic growth and a weaker dollar. The overall economy has had sluggish growth for some time, at around 2%, which is not good news for industrial companies. But gross domestic product expansion topped 3% in the second quarter. The third quarter GDP may be held back because of the fierce storms that battered Texas, Florida and Puerto Rico. The trend, though, seems to be upward.
Meanwhile, there’s an additional boost for industrials: The dollar has slumped for most of this year, reversing a rally after Donald Trump’s election last November. The president’s inability to pass his legislative agenda, at least so far, has weighed on the greenback. So has higher economic growth in Europe and elsewhere, which has helped foreign currencies at the dollar’s expense.
The result is that U.S. goods are cheaper overseas, which is a boon for American manufacturing.
Higher interest rates. The Federal Reserve appears committed to hiking rates, with the next step up expected at its December meeting. This trend is very helpful to the banks, which have suffered in an era of low rates. The main way banks make money is by gathering deposits and lending them out at a higher rate. But when their lending-out rate is lower, their earnings get squeezed.
This so-called spread should widen as rates ratchet up. Then maybe Cramer won’t need to complain that JP Morgan and Citi are under-valued.
https://www.forbes.com/sites/lawrencelight/2017/10/26/how-to-make-money-when-value-investing-comes-back/
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