Yahoo Finance Why Financial Advisors Love Value Stocks in 2018
Last year was a high-flying one for growth stocks like Amazon.com (Nasdaq: AMZN), Facebook ( FB), Netflix ( NFLX) and PayPal Holdings ( PYPL), which each soared more than 50 percent.
But now after a long bull run, some portfolio managers and advisors are spurning the more expensive stocks to look for diamonds in the rough that also come at a cheaper price.
To be clear, there's a lot of subjective gray area around which companies can be classified as value stocks -- and thus a bargain -- but generally these companies stay out of the headlines because they're not in the hottest industries. They also usually offer higher dividends and, despite strong fundamentals, have lower price-earnings or price-sales ratios than growth stocks.
[See: 7 of the Best Stocks to Buy for 2018.]
In 2017, the Standard & Poor's 500 Growth index, which is top-heavy in tech stocks like Apple ( AAPL), Microsoft Corp. ( MSFT) and Google-parent Alphabet ( GOOG, GOOGL), gained 25 percent. In contrast, the S&P 500 Value index, which tracks more staid companies like Berkshire Hathaway ( BRK.A, BRK.B), JPMorgan Chase & Co. ( JPM) and Exxon Mobil Corp. ( XOM), rose just about half that, gaining 13 percent last year.
While value stocks underperformed the broader market in 2017, they tend to lag in stock rallies, says John Buckingham, chief investment officer of AFAM Capital Asset Management. He also notes that value stocks tend to outperform in rising interest and inflation rate environments, which could position them well for stronger macroeconomic growth in 2018.
"I am relatively neutral on the S&P 500 because it performed so well. I'm more optimistic about value stocks because they performed so relatively poorly last year," says Buckingham, who is also the editor of The Prudent Speculator newsletter.
Among Buckingham's 2018 picks is Tutor Perini Corp. ( TPC), a civil engineering and construction company that could be well-positioned to benefit from increased government spending if Congress approves new infrastructure projects this year. Plus, the company already has a $7.5 billion backlog of projects in the works, he says. The stock has recently been trading at around 13 times its trailing 12-month earnings, compared to 17 times earnings for competitors.
Buckingham also names Goldman Sachs Group ( GS) -- while not traditionally classified as a value stock -- as a potential bargain compared to other financial firms. The new tax law gives corporate America a "bounce in its step" and makes it cheaper for multinational firms to repatriate foreign cash, which could in turn, lead to more dealmaking, Buckingham says. "Goldman being a premiere player in dealmaking, will continue to get a lion's share of that business," he says. Meanwhile, rising interest rates and an improving economy could help the financial services industry in general to exceed expectations, too.
[See: 7 of the Best Blue-Chip Stocks to Buy for 2018.]
"Goldman is one of the least expensive names in the financial space, relative to other companies," Buckingham says. "It's just not being rewarded with the proper price that it should receive based on the likelihood that earnings should significantly improve."
The stock has recently traded about 13.7 times earnings, below the industry average P/E of 18 over the last 10 years.
Robert Finley, principal at Virtue Asset Management, has been recommending his clients start rotating from growth to value stocks. Wal-Mart Stores ( WMT) is one of his largest holdings right now, mainly because he suspects other investors are underestimating just how well the big-box giant will compete with Amazon in the future.
"It is the anti-Amazon, and I don't think Walmart is going to go out of business," he says.
Thyra Zerhusen, CEO and chief investment officer of Fairpointe Capital, which has $6 billion under management, is betting on Mattel ( MAT). New management under Google-veteran Margo Georgiadis, who became CEO last year, has promised to take the toymaker in a new direction, and the company still boasts an impressive roster of classic brands, ranging from Barbie and Fisher Price to American Girl and Hot Wheels.
"It's a stock that was quite undermanaged, had bad execution -- but it's still one of the biggest toy companies in the world. The stock, in my opinion, is quite undervalued," Zerhusen says, noting that MAT recently traded at a price 1 times sales, down from its five-year high of 2.5. In contrast, competitor Hasbro (HAS) has recently traded at a 2.2 price-sales ratio.
[See: These 7 Funds Make You Feel Good About Investing.]
Overall, one of the biggest reasons to bet on value stocks is their lower volatility compared to their growth counterparts, Buckingham says. In the dot-com bust of 2000 and 2001, value stocks outperformed the broader S&P 500, and he suspects that if the bull market is in for a correction this year, value stocks will similarly be a safer bet.
"In today's markets, where people are chasing the Teslas ( TSLA) and bitcoins and Amazons of the world, we would be much more interested in investing in the things that people have exited," Buckingham says. "So many investors are chasing last year's hot stock. We're investing in the more boring parts of the market."
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