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Jan. 25, 2020, 11:06 a.m. EST

Apple has soared out of the value realm, but you may still be able to find success on this stock list

Stock valuations have gotten so high that the value crowd is crowing again

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By Philip van Doorn, MarketWatch


Bloomberg
A Series 5 Apple watch. The company’s price-to-earnings valuation has increased dramatically.

It’s happening again: The financial media is touting a potential shifting of investors to value stocks from the growth stocks that have propelled the extended bull market in the U.S. This last happened in September and October, though the value buzz ended up being short-lived.

Now the steady rally in stock prices over the past several months has driven the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.60%  to an exceptionally high price-to-earnings valuation, making value stocks look particularly appealing to some investors. And some stocks have moved out of the value space over that time; Apple /zigman2/quotes/202934861/lastsale AAPL -0.20% , for one, has had one of the biggest shifts in valuation in the last three months.

Wall Street has its own group of favorite value stocks, listed below. What matters most, of course, is your own opinion — is it time to shift to a value strategy?

The new arguments for value

The tremendous gains for U.S. stocks over the past year haven’t been propelled by earnings growth — analysts estimate that earnings per share were essentially flat for 2019. Investors simply have been willing to pay more for U.S. assets, as the Federal Reserve has switched its policy to lowering interest rates and increasing other stimulative activities, and central banks in Europe and Japan have maintained negative-interest-rate policies.

Mark DeCambre digs into the nervousness of professional investors as the market sentiment has turned “irrationally bullish.” Chris Matthews shows that the S&P 500 index appears “overvalued” by more than one measure. Michael Brush makes the case for getting into value stocks early.

Among the questions to consider before shifting into value are how long you believe central-bank-driven growth can last and whether U.S. corporate earnings can grow enough over the next year or two to bring down P/E ratios.

Apple exits the value camp

Back on Oct. 22, I listed sell-side analysts’ favorite stocks in the S&P 500 Value Index. That and the S&P 500 Growth Index are overlapping subsets of the full S&P 500.

At that time, Apple was part of the S&P 500 Value Index. The index is rebalanced quarterly, and now Apple is out. This chart explains why:


FactSet

Apple’s forward price-to-earnings ratio has increased dramatically to 26.7 from 20.5 three months ago. A year ago, the forward P/E was only 13.2.

The prospect of an improved trade relationship with China is an obvious positive for Apple. Then again, the 10-year price-to-earnings chart for the stock shows how the valuation has ebbed and flowed through product-release cycles:


FactSet

Apple’s forward P/E valuation has typically been much lower than it is now. This is why it was included in the S&P 500 Value Index only three months ago, while other tech giants, including Microsoft /zigman2/quotes/207732364/lastsale MSFT -1.57% , Facebook /zigman2/quotes/205064656/lastsale FB +0.51%  and Google holding company Alphabet /zigman2/quotes/205453964/lastsale GOOG +1.39% , /zigman2/quotes/202490156/lastsale GOOGL +1.36%  were not.

If we add Microsoft, Facebook and Alphabet’s Class A shares to the 10-year forward P/E chart, it’s obvious that Apple, at least for now, no longer trades at a huge P/E discount to the others:


FactSet

More on Apple: Apple could fetch a $2 trillion valuation by the end of 2021, analyst says

Also read: Apple may not get the big 5G bump investors expect, analyst says in downgrade

/zigman2/quotes/210599714/realtime
US : S&P US
2,584.59
-42.06 -1.60%
Volume: 3.99B
March 31, 2020 5:14p
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/zigman2/quotes/202934861/lastsale
US : U.S.: Nasdaq
$ 254.29
-0.52 -0.20%
Volume: 49.25M
March 31, 2020 4:00p
P/E Ratio
20.08
Dividend Yield
1.21%
Market Cap
$1114.92 billion
Rev. per Employee
$1.98M
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/zigman2/quotes/207732364/lastsale
US : U.S.: Nasdaq
$ 157.71
-2.52 -1.57%
Volume: 77.93M
March 31, 2020 4:00p
P/E Ratio
27.45
Dividend Yield
1.29%
Market Cap
$1218.72 billion
Rev. per Employee
$902,473
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/zigman2/quotes/205064656/lastsale
US : U.S.: Nasdaq
$ 166.80
+0.85 +0.51%
Volume: 23.68M
March 31, 2020 4:00p
P/E Ratio
25.92
Dividend Yield
N/A
Market Cap
$473.03 billion
Rev. per Employee
$1.57M
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/zigman2/quotes/205453964/lastsale
US : U.S.: Nasdaq
$ 1,162.81
+15.99 +1.39%
Volume: 2.49M
March 31, 2020 4:00p
P/E Ratio
23.64
Dividend Yield
N/A
Market Cap
$835.52 billion
Rev. per Employee
$1.39M
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/zigman2/quotes/202490156/lastsale
US : U.S.: Nasdaq
$ 1,161.95
+15.64 +1.36%
Volume: 3.26M
March 31, 2020 4:00p
P/E Ratio
23.63
Dividend Yield
N/A
Market Cap
$835.52 billion
Rev. per Employee
$1.39M
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