Understanding Value Stocks
Value stocks are shares of companies that are perceived to be undervalued by the market. This means they are sold at prices that are lower than what the company is actually worth, often due to being out of favor with investors. For instance, if a company's stock is priced at $50 but its actual worth based on earnings and assets is $70, it is considered a value stock.
Historical Performance
Historically, value stocks have performed well over the long term. They have outpaced growth stocks by an annual average of more than four percentage points over the past century. Growth stocks are shares in companies expected to grow at an above-average rate compared to their industry or the overall market, but they tend to be more expensive. For example, in the 1990s, growth stocks dominated, but the tech bubble burst in 2000 allowed value stocks to shine for several years.
Current Market Dynamics
The dominance of technology stocks has recently favored growth stocks. These stocks have benefitted from low interest rates, which support companies that need to borrow for expansion purposes. The S&P 500 Growth index, heavily weighted with tech stocks, rose 32.5% last year, compared to a 15.3% rise for value stocks. However, with the Federal Reserve's interest rate hikes, there's a potential shift as higher rates often benefit value stocks.
Investment Strategies
Investing in value stocks can be done through exchange-traded funds (ETFs) that track value indices. These ETFs offer diversification and are cost-effective, with expense ratios typically under 0.2%. Some recommended ETFs include iShares S&P Value ETF and Vanguard S&P 500 Value. For those interested in sectors like utilities, energy, and banks, which are deemed attractive due to rising demand and undervaluation, sector-specific ETFs or individual stocks like ExxonMobil or JPMorgan Chase can be explored.
The Logic Behind Value Investing
Value investing is grounded in the belief that the market will eventually recognize the true worth of undervalued companies. This approach often appeals to investors looking for steady performance rather than the volatility associated with growth stocks. The fundamental idea is that "cheap beats expensive," and over time, value stocks tend to offer better returns with lower risk.
Conclusion
While growth stocks have had a stellar run, historical patterns and current market conditions suggest it's time to give value stocks another look. Investors seeking long-term gains might find value stocks a compelling choice, particularly in a rising interest rate environment.
