Talk that value stocks could finally be poised to spring back to life is mounting and that could shine a light on ETFs with refreshed views of the previously beloved factor, including the Principal Contrarian Value Index ETF (NasdaqGM: PVAL).
The Contrarian Value Index ETF will try to reflect the performance of the Nasdaq U.S. Contrarian Value Index, which includes companies taken from the Nasdaq US Large Mid Cap Index but follows a quantitative model designed to identify those that appear undervalued by the market relative to their fundamental value.
With value being out of favor for an extended period, the factor is now as cheap as its ever been relative to growth, a scenario that could boost PVAL.
“Value stocks have gone through a really rough stretch depending on which index you look at. They’ve all pretty much been out of favor for the past 10-plus years, and there are a few factors that are contributing to that,” said Morningstar analyst Alex Bryan. “Number one, the valuation spread between value and growth stocks has increased considerably over the past decade.”
PVAL Is Pertinent
In a market laden with uncertainty, it leaves factor-based strategies open for discussion and one recurring them is whether growth or value will reign moving forward. Some of the most staunch supporters of value investing are making its case as the best strategy given the discounted value of many equities following the pandemic sell-off.
“The valuation gap between value and growth stocks can’t increase indefinitely. People have been saying that for a long time, but there comes a point when the valuation spread just can’t grow any further, so I think that’s something to keep in mind,” according to Bryan. “You can’t just look at the last 10 years and extrapolate that out indefinitely. But I think, more importantly, the fundamental case for value investing really hasn’t changed.”
Investors looking for value plays must first understand what makes a company valuable. Whether it’s the product or service itself or its price-to-value ratio, investors will have to do their homework.
Underscoring the case for PVAL today, there are incredible opportunities for investors to jump into equities while the default maneuver in today’s market landscape is heading into safe-haven assets like bonds or precious metals. Investors, however, could be missing out.
“The lower valuations are today, the higher expected returns tend to be. And that’s partially because you get more for your money when you a pay a lower valuation for a stock,” notes Bryan.
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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.