Repositioning: the case for value


Robert Hum, CAIA May 20, 2021

Key takeaways

  • “Value” stocks appear poised to top “growth” stocks as the U.S. economy reopens.
  • Value and other “reopening” stocks have rallied since vaccine announcements in late 2020, and we think the trend could continue.
  • ETFs provide low-cost and tax-efficient access to diversified baskets of value-oriented stocks.

Bargain-shopping stock investors could be poised to reap the benefits of a vaccine-fueled economic reopening, potentially reversing the recent trend of technology giants leading the market higher.

“Value” investing has been a popular strategy for nearly a century and involves seeking out underpriced stocks based on measures of intrinsic worth, such as price relative to earnings. Such value stocks have outperformed their “growth” counterparts — generally younger companies with accelerating sales but less consistent profitability, by an average of roughly 4% per year since 1926.1

While growth stocks have largely outperformed in recent years, the balance has shifted in favor of value recently amid signs of optimism for a post-COVID economic reopening.2

A value rally may just be getting started

Many value companies have inflexible business models that cannot be easily repurposed — think hotels and airlines — and tend to generate revenues with in-person interactions. In turn, investors responded to the pandemic threat by placing a premium on those more associated with social distancing. But since Nov. 9, 2020, the day that Pfizer and BioNTech announced an effective COVID-19 vaccine, stocks that should benefit from an economic reopening, many of which are value stocks, have rallied.

Since the vaccine announcement, reopening winners have outperformed social distancing winners

Since the vaccine announcement, reopening winners have outperformed social distancing winners

Source: BlackRock, Bloomberg, JPMorgan, as of 4/30/2021. For illustrative purposes only. Social distancing winners and reopening winners are based on baskets constructed by JPMorgan of stocks likely to benefit or lag from extended social distancing (JPAMDISO and JPAMDISU, respectively). Each basket includes 30-50 stocks which are weighted by liquidity. Specific companies or issuers are mentioned for educational purposes only and should not be deemed as a recommendation to buy or sell any securities. Any companies mentioned do not necessarily represent current or future holdings of any BlackRock products. Specific companies or issuers are mentioned for educational purposes only and should not be deemed as a recommendation to buy or sell any securities. Any companies mentioned do not necessarily represent current or future holdings of any BlackRock products. For actual ETF holdings, please visit a fund’s profile page on www.ishares.com. For VLUE’s holdings, please click here. Index performance is for illustrative purposes only.  Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


Since the vaccine annoucement, returns for large U.S. value stocks have topped those of the S&P 500 by 16%, and growth by 22% (shown below in the left portion of Figure 2). Some may expect that the value rally has already had its day, but considering that previous underperformance exceeded 100% versus growth since 2017 (shown below in the right portion of Figure 2), we believe there is room to run.3

The recent rally in value securities may have room to run

Since the vaccine announcement, reopening winners have outperformed social distancing winners

Source: MorningStar Direct as of 4/30/2021. Value= MSCI USA Enhanced Value Index. Growth= Russell 1000 Growth Index. U.S. Market= S&P 500 Index.Index performance is for illustrative purposes only.  Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


Summing it up

Value stocks tend to be economically cyclical, and have tended to perform well during economic recoveries.4 While this has not been a typical economic recovery since the snapback from global pandemic has been swift, we expect that value stock performance will continue to reflect expectations for an uptick of in-person business as the economy reopens.

Our portfolio solutions team recently analyzed close to 20,000 financial advisor portfolios, finding that 62% were underweight value relative to their respective benchmarks.5 We believe an economic reopening presents an opportunity to reevaluate these value underweights, especially considering that value has historically been rewarded over the long term.

More specifically, index-tracking exchange traded funds (ETFs) offer the potential for investors to add value-oriented stocks in an affordable, diversified and tax-efficient manner.

 

Robert Hum, CAIA

Robert Hum, CAIA

U.S. Head of Factor ETFs

Christopher Carrano

Contributor