By Nigam Arora
Many prudent investors are gravitating toward value investing, the strategy of finding and buying undervalued stocks. On the surface this makes sense, given that the economy is in terrible shape.
However, before following a value strategy, look at the charts linked below. You may find it’s best to avoid concentration in value stocks at this time.
Please click here for an annotated chart of the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA +1.28% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.30% .
Please click here for a chart of the S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.30% , which does the same for the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.27% , compared with eight popular stocks and ETFs.
Note the following:
• The first chart gives a long-term perspective. It shows that the stock market in May has been slightly below the low band of the resistance zone but is now threatening to penetrate the resistance zone.
• The second chart shows five big tech stocks — Amazon /zigman2/quotes/210331248/composite AMZN -0.61% , Apple /zigman2/quotes/202934861/composite AAPL +1.45% , Microsoft /zigman2/quotes/207732364/composite MSFT -1.99% , Facebook /zigman2/quotes/205064656/composite FB -2.03% and Alphabet /zigman2/quotes/205453964/composite GOOG +0.11% /zigman2/quotes/202490156/composite GOOGL -0.10% . Please see “Investors have $5.1 trillion hiding out in the shares of five companies, which will be tested this week.”
• The second chart shows stock of Berkshire Hathaway /zigman2/quotes/200060694/composite BRK.B +1.48% , Warren Buffett’s company. Buffett is known for finding value in the stock market.
• The second chart shows the large-cap value iShares S&P 500 Value ETF /zigman2/quotes/206097129/composite IVE +0.96% .
• The second chart shows the SPDR S&P 600 Small Cap Value ETF /zigman2/quotes/208370743/composite SLYV +1.70% .
• The second chart shows that Buffett has underperformed Apple stock by 18% even though he is a major shareholder. This also shows how poor the performance of the rest of Buffett’s portfolio has been. Still, Buffett is not buying stocks. Please see “Warren Buffett says to ‘bet on America’ — here’s one prudent way to do it.”
• The second chart shows that the large-cap value ETF has underperformed Amazon stock by about 44%.
• The second chart shows that as bad as the performance of the large-cap value ETF has been, the small-cap ETF has performed worse — it’s underperformed by about 12%.