Value Stocks: They're Riskier Than You Think

This interesting Wall Street Journal article points out that value stocks, or value investing strategies, have been some of the hardest hit during this bear market and often times underperform during recessions. According to the author, “since the market peak in October 2007, an iShares exchange-traded fund designed to mimic value stocks in the S&P 500 is down some 56%, compared with 53% for the S&P 500 itself. The iShares ETF that mimics “growth” stocks — those with fast earnings or price growth — is down about 44%.”

The author points out that “contrary to popular belief, value strategies often do poorly during recessions, especially relative to growth strategies. The reason is simple: When growth is scarce, as it is in a recession, then investors pay a premium for companies that manage to keep growing.” In the current downturn, financial stocks have enhanced the underperformance of value stocks, and many value investors got sucked into thinking there was value in financials. But because “assets on bank balance sheets were tied up in mortgage debt, which was rapidly declining in value”, the valuation analysis was often misleading, resulting in what is known as a “value trap”. “A lot of people were buying these stocks all the way down,” says Bill King, chief market strategist at M. Ramsey King Securities. “Their models couldn’t pick up what was garbage, so they couldn’t adjust quickly enough.”

Joseph Mezrich, head of quantitative research at Nomura Securities, “thinks one sign that value’s turning point is near will be when analysts are finally in consensus about future earnings. His research found that, in the past 20 years, value stocks tend to do worse when confusion on Wall Street about earnings is rising, as it has been since late 2007.”

Send a Comment

Your email address will not be published. Required fields are marked *