By Philip van Doorn, MarketWatch
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 +0.18% 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/composite AAPL +2.46% , 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 /zigman2/quotes/210599714/realtime SPX +0.18% 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:
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:
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/composite MSFT +0.78% , Facebook /zigman2/quotes/205064656/composite FB +1.66% and Google holding company Alphabet /zigman2/quotes/205453964/composite GOOG +0.52% , /zigman2/quotes/202490156/composite GOOGL +0.77% 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: