We all know what value investing entails. It involves buying stocks that trade well below their estimated value. These stocks are usually undervalued because of a variety of unfavorable environments that are considered temporary. It’s an investment philosophy used by many and a lot of investors have achieved tremendous success using it. It’s how Warren Buffett arguably made his billions.
If you’re a value investors you might have noticed that value has underperformed the general market for some time now, even though you might not want to admit it. In the following table you can compare the Russell 1000 Growth ETF vs the Russell 1000 Value ETF performance relative to the S&P500 index over the past ten years. We can clearly see that value has underperformed.
Now, I’m not going to exclude other investment styles and act as if value has been the only underperformer because styles like high dividend yield stocks and small-cap stocks have also underperformed the market by a big margin. But, I digress. I want to stay on the topic of value, which actually might be making a comeback. So far, in 2021, value has outperformed growth though value still has some tremendous catching up to do. Can this trend continue in 2021?
Last year, value was poised to make a comeback as these strategies are famous for their exceptional performances during market downturns but all we saw was growth benefiting from the market crash. The outperformance of growth even during the pandemic can be traced back to the exceptional performance of tech. Companies like Amazon and NVIDIA did remarkably well. Record low interest rates and government support also provided substandard companies with the means to survive. A natural market would’ve weeded them out.
Right now, value has been steadily making a comeback as investors are looking towards undervalued sectors and this has been visible during the last few weeks when financials and energy stocks have been outperforming the market. The shift from growth to value comes from the high valuation multiples that growth stocks are currently experiencing, lots of investors aren't too comfortable with buying tech stocks trading at extremely high valuations so, they look elsewhere.
To give an example, we can see Chevron performed well recently, it also broke out of a rectangle consolidation after it became clear that Warren Buffett acquired a 2.5 percent stake in Chevron amounting to approximately 4.5 billion dollars. The energy sector was lagging behind the general market by a big margin because of the pandemic, but now that the global economy is set to recover, these companies are arguably undervalued.
The upcoming economic recovery could really kickstart a bull run for value. It wouldn’t be a surprise as value stocks tend to perform really well during economic recoveries. Especially high quality companies that are currently undervalued. Low interest rates with an injection of trillions of dollars into the economy and business activity opening up again all over the world means value could become extremely attractive.
The relative strength chart is also looking more and more interesting. The chart is forming a rounding bottom which is a bullish reversal pattern. It could very well signal the beginning of a major bull run for value relative to the S&P500.
How do rounding bottoms work? In the picture below you can see how a textbook rounding bottom plays out.
