An odd thing happened> on the way to financial oblivion last year. Stocks that started off cheaper than the broad market performed much worse than ones that didn t.
Value investors, as people who favor such inexpensive shares are called, understandably expected them to lead the market in 2009. Incredibly, they ve continued to lag well behind until just the past few weeks. So are value stocks finally ready to soar?
Let s first define the terms. Growth and value" are wishy-washy descriptors, since all companies are meant to grow, and since just about any stock that will be worth more tomorrow is something of a value today. I prefer the terms popular and unpopular. Generally speaking, growth stocks are popular. They fetch prices equal to many times their current profits or asset values, on the assumption that their profits or asset values will grow quickly in coming years. Value stocks are less popular. They trade at lower multiples of their profits and asset values because they re not expected to grow as quickly.
There are no firm numeric cutoffs. Stocks exist in a spectrum between growth and value, not on either side of a fence. Hence, mutual funds and stock indexes labeled as growth and value often hold or track the same stocks. To get a clear read on how the two styles are performing, focus on benchmarks that have no overlap, like the S&P Pure Growth and Pure Value indexes. Last year, Pure Value lost 48%, while Pure Growth lost 39%. This year through April, Pure Value lost just under a percent, while Pure Growth gained 10%.
That s not normal. In past market downturns from December 1980 to July 1982, from September 1987 to November 1987, from September 2000 to September 2002 value stocks outperformed. They trade with less popularity, after all, so they have less of it to lose when stocks as a class lose luster. But value stocks are often cheap because of company flaws that, while perfectly manageable in a normal market downturn, can turn disastrous in a global financial flush like the one that began in earnest last fall. Investors during the worst bits of the past year stopped asking about the return on their money and started asking whether they will ever see a return of their money, reckons Robert Arnott, whose firm, Research Affiliates, manages indexes that skew toward value stocks.
A close look at the numbers suggests value stocks might have recently broken free of the abuse. While they ve trailed year-to-date, the damage happened early when the market was falling. Through May 9, the S&P 500 index dropped 25%. Pure Growth lost only 20%, while Pure Value plunged 44%. In April, when stocks rose, just the opposite: Pure Growth gained 15%, while Pure Value soared 32%.
Below are listed a handful of members of the S&P 500 Pure Value index that still seem attractively priced.
|Avery Dennison||AVY||Paper products||$28.42||11||5.8|
|Big Lots||BIG||Discount stores||28.35||15||n/a|