By John Wasik
CHICAGO Feb 22 In the mercurial world of stock
market trends, predicting whether the market is favoring growth
or value styles is an either/or situation.
Sometimes growth stocks, which tend to produce consistently
higher earnings, dominate. Then they fall out of favor, as value
stocks, bought at bargain prices relative to their potential
market value, take the limelight.
The nature of the beast in the growth vs. value tug of war
is that when big money managers conclude that growth stocks may
be getting overpriced then it is time to look for bargains.
Since institutions tend to move in a herd, a switch en masse
happens almost simultaneously and billions flow into
bargain-priced stocks over a period of months. Sometimes the
buying lasts for years.
Indeed, the value shift appears to have gained some ground
year-to-date through Feb. 15, as the value ledger of the S&P 500
rose 7.3 percent compared to 5.4 percent for growth stocks, S&P
"We do think that this is a trend that could have legs,"
says Todd Rosenbluth, director of Mutual Fund Research for S&P
Capital IQ, a market research company based in New York. "But
it's still early in 2013."
The last major value cycle ran roughly between 2001 and
2008. That was in the wake of the dot-com implosion and
recession of 2001, when growth stocks largely crashed and burned
after the manic tech-bubble run of 1998 to 2001. In the recovery
from the 2008 meltdown, though, growth stocks have largely
dominated, as companies rebuilt their earnings streams.
Although you can make money in either market phase, the
value cycle might benefit you better because it tends to step
away from stocks that can be overvalued and due for declines.
Unlike growth stocks near the peak of their popularity, value
stocks often offer more upside potential.
Sometimes popular growth stocks like Apple, are
burdened with unrealistic upside expectations and any
disappointment in news or earnings leads to a sell-off. Since
hitting a 52-week high of $705 last September, for example,
Apple stock has seen a precipitous decline and has been trading
under $500 of late.
While short-term trends can be misleading, some recent
evidence points to a value upsurge. Large-cap value funds,
according to Lipper, a Thomson Reuters company, gained 17
percent for the one-year period through Jan. 31. That compares
with 16.8 percent for the S&P 500 Index and 13.3 percent for
large-cap growth funds.
It could be that the recent value returns are driven by
heavy weightings in the financial sector, underdogs in recent
years that experienced a comeback last year and rose more than
24 percent as a group. Or, maybe the tide is turning and large
institutions are making a shift toward value investing.
Although no one really knows when a cycle makes a turn in
real time - it is best to make this call through the rear-view
mirror - consistently investing in value offers a way to grab
bargain-priced stocks with slightly lower volatility and higher
dividends than their growth cousins.
HOW TO INVEST
In considering value stocks, it makes sense to diversify
across countries and the size of companies: large-, mid- and
small caps. Index funds generally give you the broadest array.
For large companies, the Vanguard S&P 500 Value ETF
, invests in more than 350 stocks found in the S&P 500
Value Index. The companies in this portfolio may not seem like
value stocks, but are mostly household names such as General
Electric Co, Exxon Mobil Corp and AT&T Inc.
It is also a good way to own the company run by Warren
Buffett, Berkshire Hathaway Inc, which is a living
testament to value investing; the fund has a 2.6-percent stake
in the company. The Vanguard fund was up nearly 20 percent for
the year through Jan. 30.
Vanguard also has a Mid-cap Value ETF that tracks
the MSCI US Midcap Value Index and holds companies like Mattel
Inc and Seagate Technology PLC. It was up 18
percent over the same period.
For small companies, you will not encounter any brand names,
but you may see some greater potential for appreciation. The
WisdomTree International SmallCap Dividend ETF focuses
on companies across the world that also pay dividends, which is
a rarity for companies under $1 billion in market
capitalization. The fund returned almost 20 percent over the
annual period through January 30. and pays a 3.4 percent yield.
By employing a balanced approach, you could split the
difference between growth and value funds - 50 percent each - or
simply buy a fund that tracks an index with a larger number of
stocks in it. The iShares Russell 3000 Value Index holds
10 percent of its portfolio in small caps, although it is still
dominated by mega-caps such as Procter & Gamble Co and
Chevron Corp. The fund gained 20 percent for the year
through Jan. 30.