Value Stocks Could Hit the Comeback Trail

“Already, some small cap value stocks are outperforming the broader category of small caps,” observes Sheaff Brock Managing Partner Dave Gilreath. There are various indications, Gilreath adds, that the long period in which growth stocks dominated the stock market may be moving towards an end.

Growth vs. value

With both growth and value stocks, there is an expectation that, over time, they will outperform the overall market, but the two types of stock don’t tend to do that at the same time. Growth stocks are sometimes those of small to midsize companies that appear to have a product or service that is likely to give them an edge over their competitors during the next few years. Value stocks, meanwhile, are typically larger and more well-established companies that happen to be trading below what analysts judge to be their worth.

Dividends

It’s somewhat rare for growth stocks to pay out dividends; instead growth companies tend to reinvest earnings back into the company for research or expansion. Value stocks do typically offer regular dividends.

So which is “better”?

Investopedia.com cites a Seeking Alpha report study showing that, from 2000 through 2013, value stocks outperformed growth stocks. Still, in the latter portion of the period (2007-2013), growth stocks posted higher returns. The author concluded that the study provided no real answer as to which type of stock was “better” overall.

Signs on the horizon

Historically, Gilreath observes, technology stocks have been “avatars” for growth, while financial stocks have been “avatars” for value. But, since last year, he says, two trends have been waning:

1. The outperformance of tech over financials is slowing (pressure by Congress on anti-social leanings of social media is hurting big tech companies).
2. The outperformance of the S&P 500 pure growth index relative to the S&P pure value index has been decreasing.

At least four specific upward trends have been helping value stocks:

1. price of transport stocks (which are value stocks)
2. price of commodities (this helps value stocks such as metals, energy, and mining)
3. “reverse globalization” (the desire to bring manufacturing of car parts, batteries, and chips back to the U.S.)
4. the decrease in the spread of the Delta variant of COVID-19 (this is helping big companies reopen their offices and plants)
5. rising interest rates (this challenges earnings-sensitive small companies more than large ones)

Looking back and peering ahead

Although it hasn’t done it through this long, albeit interrupted, bull run, the market has, historically, tilted towards value more often than growth, Gilreath points out. Now, he believes, economic conditions seem to bode especially well for a resurgence of value stocks.