By Mark Hulbert, MarketWatch
It takes guts to be a value investor these days. But the top-performing investment newsletters have no shortage of courage. By value, I’m referring to stocks that are out of favor, trading for relatively low ratios of price-to-earnings, book value, sales, and so forth. Value’s opposite is growth: Stocks in this latter category typically trade for high valuation ratios.
I’m not kidding when I say that value investing takes guts. According to a recent analysis from Research Affiliates , value has lagged growth now for more than 13 years — the longest stretch in recorded U.S. market history. This has led to a seemingly-endless series of pronouncements in recent years that value investing is dead.
Try telling that to the top performing investment newsletters tracked by my Hulbert Financial Digest performance-auditing firm. These four stocks are tied for being the most recommended right now by those newsletters:
• Walt Disney /zigman2/quotes/203410047/composite DIS -0.73%
• FedEx /zigman2/quotes/203047719/composite FDX -0.75%
• IBM /zigman2/quotes/203856914/composite IBM +0.98%
• JPMorgan Chase /zigman2/quotes/205971034/composite JPM +0.32%
Notice the absence of any of the so-called FAANG stocks that have been leading the market in recent weeks.
All four of these stocks are instead solidly in the “value” category: Their average trailing 12-month PE ratio, for example, is 35% lower than the S&P 500’s /zigman2/quotes/210599714/realtime SPX +0.45% . Their average price/book ratio is 26% lower, and their average price/sales ratio is 10% lower. (See chart below.) And given their status as value stocks, it is not a surprise that they have been lagging of late.
The newsletters recommending these four stocks have excellent long-term performance. I calculate that, over the last 20 years (through April 2020) they have outperformed the S&P 500 by 3.2 percentage points annualized. (These figures take dividends and transaction costs into account.)
A chance to buy good-quality stocks at a discount.
The newsletters’ rationales for buying these stocks are the same in all cases: Despite shorter-term disruptions because of the coronavirus pandemic, each of the four companies have excellent long-term prospects. Their current struggles give investors a chance to buy good-quality stocks at a discount.
This is, and always has been, the classic refrain of the value investor, of course. Is there reason to believe that the newsletters’ faith in these stocks will be rewarded, even though value has lagged for the last 13+ years? Yes, and one reason is these newsletters’ excellent long-term records.