With growth stocks garnering most of the attention in January, and for all the wrong reasons, investors are rightfully considering greener pastures.
An obvious destination is value stocks, and some of the related exchange traded funds are proving to be valid hideouts while growth stocks slump. For example, the Invesco S&P 500 Pure Value ETF (RPV) is flat on a year-to-date basis while the S&P 500 is lower by more than 9%.
Broadly speaking, 2021 was kind to value stocks. For example, RPV jumped 34.2%, easily outpacing the S&P 500 and the S&P 500 Value Index. Naysayers claim that value’s 2021 resurgence was the result of an economic recovery fueled by easy monetary policy and that last year was the first time in over a decade that value looked compelling relative to growth.
However, evidence, including RPV’s impressive-by-comparison start to 2022, is emerging that value stocks could be in a for lengthy spell of beating growth.
“Value stocks are more sensitive to the strength of demand in the economy than growth shares, so they surged as the economy rapidly bounced back in response to Washington’s trillions of dollar in fiscal and monetary stimulus and the lifting of stay-at-home orders. Gains in growth stocks, which fell less as the economy stalled out in the spring of 2020, have been smaller,” reports Jacob Sonenshine for Barron’s.
Adding to the case for RPV is the fact that earnings for value companies are rising at a pace comparable to or in excess of growth firms.
“Just look at analysts’ estimates. Expected earnings growth for value firms is catching up to that of growth firms. The average estimate of long-term growth in earnings per share for the Russell 1000 Value Index is now just over four percentage points below that for its growth-index counterpart, according to RBC data. That is down from a nine-point differential seen in the middle of 2020, before the economic recovery truly kicked in,” notes Barron’s.
There are other near-term factors that could kick RPV into high gear this year. The fund allocates 31.75% of its weight to financial services, positioning it ideally for an environment of rising interest rates. Additionally, RPV devotes over 17% of its weight to the consumer staples and energy sectors — two groups that are benefiting from rising inflation. The S&P 500 allocates less than 10% of its weight to those sectors.
Bottom line: 2022 could be a good time to be a value investor.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
