Did Value Investing Ever Go Away?

With value and growth stocks tending to move in cycles, investors are taking renewed interest in value investing after its outperformance in 2022.

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With value and growth stocks tending to move in cycles, investors are taking renewed interest in value investing after its outperformance in 2022.

According to an article in the May issue of Kiplinger’s Personal Finance, the volatile year of 2022 resulted in the widely held exchange-traded fund (ETF) iShares S&P 500 Growth (IVW) falling 24.1% more than the iShares S&P 500 Value ETF (IVE). This was a reversal from 2020, when growth stocks outperformed value stocks by the widest margin in almost a century—more than 30 percentage points.

However, the Kiplinger article quotes a Dimensional Fund Advisors report asserting that value stocks never go away, unlike some growth companies. This is because value stocks are generally cheaper to buy, and growth stocks cannot sustain their momentum indefinitely. Interestingly, some tech giants like Microsoft and Amazon are considered both value and growth stocks, and they are among the top holdings in both indexes.

Interest rates are another factor that affects whether investors’ gravitate toward growth or value. When interest rates are low, investors tend to take on higher risks for potentially higher returns, which fueled the remarkable performance of growth stocks in recent years. The article quotes Tanos Santos from the Columbia School of Business commenting that as interest rates normalize, investors will tend to pay closer attention to fundamental factors of company operation such as price multiples, which tend to identify undervalued stocks.

Index providers at S&P Dow Jones Indices look for a low price relative to earnings, book value and revenues to choose value stocks. For investors who aren’t inclined to conduct their own research and analysis to find undervalued stocks, Kiplinger’s suggests ETFs and mutual funds since they rebalance their portfolios based on changes. Another option is Berkshire Hathaway, Warren Buffett’s holding company, which owns significant shares in well-known value stocks.

Source: “Value Investing Is Back,” by James K. Glassman; Kiplinger’s Personal Finance, May 2023.