By Mark Hulbert
Evidence is building that a widescale rotation from growth to value is imminent.
I know, I know. Similar predictions have been made countless times over the past several years and, at least so far, they haven’t come to pass.
But there are several straws in the wind that suggest that this long-awaited rotation has now begun in earnest. One is the continued outperformance of value over growth since that two-day period in early November when value beat growth by more than it has in decades. Many wondered at the time if that dramatic reversal marked the end of growth’s phenomenal multi-year outperformance over value, and since then the Vanguard S&P 500 Value ETF /zigman2/quotes/201497396/composite VOOV +0.02% has beaten the Vanguard S&P 500 Growth ETF /zigman2/quotes/200197877/composite VOOG -2.50% by 4.4 percentage points.
Even more impressive is the performance of the value stocks that the top-performing newsletters were recommending at the time of that reversal. The average return since then of the 14 stocks I listed in this space two months ago has been a gain of 18.5%, versus 6.2% for the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.31% .
Another straw in the wind is the strong bets that are being placed on value by some of Wall Street’s heavyweights. Take Kent Daniel, a finance professor at Columbia University and a former co-chief investment officer at Goldman Sachs. When I was interviewing him this week for another story I was writing, he volunteered that, despite a strong belief that it’s hard to beat an index fund, he has strongly tilted his portfolio toward value over growth.
Or take Jeremy Grantham, co-founder of the Boston-based investment firm GMO. Earlier this week he argued that the stock market is in one of the biggest bubbles of all time, and that it will break in a matter of weeks or months. One of the consequences of the bubble’s deflation, he says, will be that value will hugely outperform growth. His specific advice to investment managers is to avoid U.S. growth stocks “to the maximum extent that your career and business risk will allow.”
Yet another straw in the wind is the dominance of value stocks in the list of those most recommended by the top-performing investment newsletters that my firm monitors. Of the 21 stocks that are at the top of their most-recommended list, 17 are part of the S&P 500 Value Index and only four are part of the S&P 500 Growth Index.
Each month in this space I focus on a different way of slicing and dicing a listing of stocks and ETFs that are most recommended by these top-performing newsletters.
For this column I am focusing on industries that are most represented by their most-liked stocks. It turns out that the newsletters’ most popular industries are those that will do well only if the economy recovers from its pandemic slump and starts firing on all cylinders, which in turn is the very economic environment in which value should outperform growth.
This focus on industries, as opposed to individual stocks, captures a different feature of newsletter editors’ thinking. For example, it’s possible that the newsletters are recommending many stocks from a particular industry, but not favoring any one stock in particular. That industry therefore might not show up in a ranking of the newsletters’ most-recommended stocks, but nevertheless would when I list which industries have the most overall recommendations.
Such is the case for the electric and gas utilities sector. No stocks from this industry show up in the list of newsletters’ most-recommended stocks, and yet it is their fourth-most-recommended industry. It’s worth noting that this industry represents a bet on robust growth in energy demand in coming quarters, which should favor value over growth.
Below I list the newsletters’ most recommended industries, along with the two stocks in each that receive the most recommendations. (If there is a tie for second place, I include all those in that tie.)
Chemical and allied products
Industrial machinery and equipment
Electric and gas utilities
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com .