Value is back and being talked about more than at any time in the last 15 years. The value investing strategy has been around forever but often gets overshadowed by more exciting “growth” investing. The basic premise is to invest in a stock or basket of stocks that appear cheap based on a particular metric, say earnings per share (total profit divided by total share count). The strategy was codified in 1928 by Benjamin Graham and later made more famous by Warren Buffett. All year there has been a growing drumbeat for the value sector as borrowing rates have increased and growth stocks have fallen out of favor. The darling of this sector has been energy (as discussed in previous posts), but favored names now include drug companies, banks, defense industry stocks, and some consumer staples like Walmart and Coke. Investing in boring companies and industries like these have remained a part of our core strategy (even during the high growth euphoria era) because they are stable and allow you to fight another day. Additionally, value investing often leads to dividend investing by default. Many companies that are well established and stable, without rapid growth trajectories will issue dividends to their shareholders rather than reinvest the cash for growth. This too can smooth out a bumpy market in your portfolio. So, regardless of where one is in the market cycle, value investing plays an important role in a healthy overall portfolio.
As mentioned above, growth investing has outperformed value over the last 15 years, with some variance along the way. Cheap money made it easier for start-ups and other high-growth companies to grow market share using leverage. And many companies built up a lot of leverage. We are seeing bankruptcies in that high-growth space now, especially crypto companies that essentially grew from obscurity to multibillion-dollar companies in the span of a few years using massive amounts of borrowing (or in some cases customer funds). The reckoning for growth stocks and relative outperformance by value stocks have been so severe over the past year that now around 20 “growth” stocks are trading at a lower price-to-earnings than their “value” counterparts in the large-cap index. This may be a sign that a bottom is near for growth companies or possibly the market in general. The growth index is down 25% this year versus just 5% for the value index. Chip maker Qualcomm and parent company of Facebook, Meta, (both growth companies) now trade at just 11 times earnings making them about half as expensive as Lowe’s and Home Depot and about a 65% discount to Nike. There may be some value in the growth sector.
It is impossible to tell precisely when one sector will fall out of favor for another, that’s why a balanced approach makes the most sense for most investors. Our philosophy is to both follow momentum and invest for stability (low volatility and value/dividend funds). The market is forward looking. It consistently tries to look 6-9 months ahead. Take for example the price action of video chat company Zoom. The stock price has been declining for months even as the earnings were growing. But in their latest earnings report they announced slower growth and the stock actually improved. The market anticipated the slower growth and beat down the stock in the previous months. But now it appears an equilibrium has been reached if not an expectation or renewed growth to come. The market anticipated and acted accordingly. The market has been anticipating value stocks to play a larger role in the new high-interest rate economy. While that is most likely true, we cannot count out the value that is hiding among the growth companies.
“Always buy your straw hats in the winter.” – Benjamin Graham