Don't Get Spooked By Value Stocks

Value stocks may have underperformed growth stocks for several years now, but Validea CEO John Reese says investors would be wise not to pronounce value investing dead anytime soon.

“Given that it’s Halloween season, it seems appropriate that value stocks are starting to stage a comeback in the United States,” Reese writes in his latest column for Canada’s Globe and Mail. “Much like the villain in a scary slasher flick, value stocks have been beaten, battered and, by many, presumed dead. They’ve been losing to growth stocks since mid-2006, marking the longest stretch of imbalance in the growth/value cycle in more than three decades,” according to Credit Suisse.

Reese says that in theory, value investing should in fact “have been killed off a long time ago.” Given the amount of studies that show value investing wins over the long haul, and the length of time that those studies have been fairly well known, the value advantage should by now have been arbitraged away, he says. But, despite value’s recent struggles, that’s not the case. “In fact, even people who invest in value funds don’t take advantage of the premium that value stocks tend to earn,” Reese writes. He offers data showing how value fund investors underperformed the funds in which they invested by a significant margin from 1991 through 2013. “Alleged ‘value investors’ weren’t helping close the gap between value and growth returns – they were actually adding to the gap by ditching their funds and buying hot, expensive picks and letting cheap value stocks get cheaper,” he says. “And lower prices mean better prospective returns for value stocks when the value/growth leadership switches back to value.”

Reese says that sticking to value stocks is difficult, because many of them are the types of stocks that have negative headlines hovering over them. But, he says, that’s why they earn a premium over the long haul, and why the value premium isn’t likely to die. If you stay disciplined and focus on value, history shows you can beat the market over the long term, he says.

Reese looks at a trio of value stocks that his Guru Strategies are high on right now. Included among them: Pilgrim’s Pride, which gets strong interest from his David Dreman-based strategy.