NEW YORK (Reuters) - Value stocks are getting a once-over from some U.S. growth fund managers in early 2018 as they prowl for overlooked shares they think have more upside in a market that gained nearly 20 percent last year.
Value stocks, so labeled because they typically sport lower price-to-earnings valuations, tend to be in more staid or out-of-favor industries and often lag during outsized stock rallies, which is exactly what happened in 2017.
The S&P 500 Value index .IVX - a measure of companies such as Berkshire Hathaway Inc (BRKa.N) and JP Morgan Chase & Co (JPM.N) - gained just 12.6 percent last year. That is a tortoise’s pace measured against the far more hare-like S&P 500 Growth index .IGX, which doubled that performance. It clocked a 25.4-percent rise courtesy of its heavy contingent of tech giants like Apple Inc (AAPL.O) and Microsoft Corp (MSFT.O).
As a result, even some growth funds are moving out of high-flying technology stocks and increasing their positions in stocks they see as more reasonably valued at a time when the American Association of Individual Investors survey shows the greatest exuberance for stocks since November 2014.
“There is some risk to the technology sector after the big run we’ve had. Where we see opportunities now are sectors that have attractive valuations and higher visibility into their revenue streams,” said Matthew Litfin, a co-portfolio manager of the $4.7-billion Columbia Acorn fund (ACRNX.O).
Litfin is now underweight technology and has been adding to its holdings of financial stocks, such as asset management Lazard Ltd (LAZ.N), which trades at a trailing price to earnings ratio of 15.1 versus 23.7 for the S&P 500 .SPX as a whole. Lazard shares are up 5.8 percent so far in 2018.
Thyra Zerhusen, a co-portfolio manager of the $4.2 billion Fairepoint Capital Mid Cap fund (CHTTX.O), said she has been moving into the likes of toymaker Mattel Inc (MAT.O) and General Electric Co (GE.N), whose corporate upheavals overshadow the value of their underlying assets.
GE, for instance, trades at a trailing P/E of 21.2, and its shares are down 41.7 percent over the last year as new chief executive John Flannery has announced plans to shrink the company and exit some of its sprawling business lines. Shares of Mattel, meanwhile, slid 46 percent over the last 12 months as it suspended its dividend and cited the bankruptcy of Toys “R” Us, the biggest U.S. toy retailer, as a factor in its weak sales.
“Last year was not a good environment for value, but now is a time when you can find investments that will go up substantially over the next two years,” she said.
So far so good: Mattel is up 4.3 percent since the new year rang in, and GE is up 6.1 percent. The S&P is up about 2.3 percent.
A good year for growth stocks does not necessarily mean that value stocks will bounce back the following year, of course.
In the 20 previous occasions that the S&P 500 jumped by more than 18 percent in one year since 1951, the index rose by an additional 10 percent or more the following year 10 times, according to Credit Suisse, with growth stocks leading the way. The other 10 times the S&P on average declined 1.7 percent the next year.
Over the first three trading days of 2018, the iShares S&P 500 Growth index ETF (IVW.P) is up 2.9 percent, while the iShares S&P 500 Value index ETF (IVE.P) is up 1.6 percent.
Yet Matthew Watson, a portfolio manager at James Advantage funds, said that his firm has been bracing for a significant correction in the so-called FAANG group of large tech stocks, such as Amazon.com Inc (AMZN.O) and Google-parent Alphabet Inc (GOOGL.O) that jumped by 30 percent or more in 2017 and pulled the broad index higher.
Instead, the firm has been adding to positions in out-of-favor energy stocks such as Diamond Offshore Drilling Inc (DO.N) and retailers such as Macy’s Inc (M.N) that have under-appreciated assets, he said.
Macy‘s, for instance, is trading barely above the value of its underlying real estate portfolio, Watson said, while Diamond Offshore trades at 70 percent of its book value, a measure of the value of the assets on a company’s balance sheet. Macy’s is down 3.3 percent in the first week of 2018, while Diamond Offshore is up 2.1 percent.
“There may be positive momentum in the stock market right now, but that is only going to make it more expensive,” Watson said. “We think that the only choice you have now to find opportunities that will pay off in the long-run is to look for value.”
(The story was refiled to corrects ‘fund’ to ‘funds’ in paragraph 4)
Reporting by David Randall; Editing by Dan Burns and Nick Zieminski
Calvin comments:
Technology Growth Stocks have overshadowed out of favor Value Stocks for the most of last year. As the Market kept piling into Growth Stocks these are becoming more and more expensive now.
These Smart Funds are now selling Overvalued Growth Stocks and Switching to Undervalue VALUE STOCKS selling below Real Assets Value like Diamond Offshore which trades at 70% of Its Book Value or NTA.
SO THESE ARE THE HIGHLIGHTS:
1) 2018 IS THE YEAR TO BUY VALUE STOCKS.
2) THESE STOCKS ARE RELATIVELY OVERLOOKED, OUT OF FAVOR AND NEGLECTED.
3) BECAUSE THEY DID NOT PERFORM WELL IN 2017 THE RISK IS LESS IN A MARKET CORRECTION (THEREFORE MORE DEFENSIVE).
4) THE POTENTIAL FOR GAIN IN THE NEXT TWO YEARS WILL BE BETTER THAN HIGH FLYING GROWTH STOCKS.
5) SO THIS ARTICLE POINTS THE WAY TO ROTATE FROM GROWTH STOCKS INTO VALUE STOCKS FOR YEAR 2018
WHAT IS VALUE?
ANSWER:
THE SUM TOTAL OF ALL ASSETS MINUS THE SUM TOTAL OF ALL LIABILITIES EQUAL NET NET VALUE!!
THIS INVESTMENT APPROACH DOES NOT TAKE INTO ACCOUNT OF A COMPANY'S FUTURE EARNINGS. OR WE MAY CALL IT THE LIQUIDATION METHOD OF EVALUATION.
SUPPOSE A COMPANY STOPS WORK RIGHT NOW TODAY WITH ALL ITS PRODUCTION STOPPED! ITS WORKERS RETRENCHED. ITS DEBTS PAID. ITS OUTSTANDING FROM CLIENTS ALL RECEIVED. ITS REAL ESTATE ALL SOLD FOR CASH. ITS MACHINERY ALL LIQUIDATED FOR CASH.
THIS IS IMMEDIATE ACCOUNTING. ALL ASSETS CONVERTED TO PURE CASH ON THE SPOT. MINUS ALL LIABILITIES.
THAT IS THE REAL VALUE (THIS PRESENT NET NET CASH VALUE OF A COMPANY)
IN KLSE WHICH ARE THE VALUE STOCKS THAT WILL STAND OUT?
CALVIN THINKS THESE ARE THE ONES (You may or may not agree)
1) MUI BHD. This one has Assets sitting on Ocean Bottom Values
2) BJ CORP. At 36 Sen Selling at NTA over Rm1.50 (Great Value)
3) BPURI (Assets overshadowed the price by a Big Margin)
4) MPHBCAPITAL (1,800 Acres Lands beside RAPID. Book Value only 82 sen psf)
5) MJ PERAK (Lands adjacent to Proton City. Only less than 50 Sen PSF)
6) OPCOM. Almost debt free with 14 Sen Net CASH.
7) MRCB. The only Govt Linked Company selling at Deep Discount to NET ASSETS
8) UEMS (This Cheapest Real Estate Stock of all. Book Value Rm5.80 Psf)
YESSS! THESE 8 STOCKS ARE ALL OVERLOOKED, OUT OF FAVOUR AND FULL OF VALUE UPON VALUE.
THESE 8 (FATT) STOCKS MIGHT BE YOUR ANG POWS FOR THIS COMING CHINESE NEW YEAR RALLY!!!
AND THE UPSIDE IS GOING TO BE POWERFUL
WISHING ALL GOOD LUCK (KONG HEE FATT CHOY)
Regards
Calvin Tan
Further Note:
Buying STOCKS WITH VALUABLE ASSETS ARE JUST LIKE PAYING PENNIES FOR DOLLAR BILLS
You pay 23.5 sen for A Dollar & 50 Sen in Mui Bhd (Yes! Mui Bhd Net Net is Rm1.50
You pay 36 sen for BJ CORP whose worth is over Rm3.00. So you pay pennies for 3 Dollar Bills. Or 3 Ringgit as in Malaysia!)
You buy MphbCap at Rm1.39 but you get the Value of a Blue Chip (MphbCap's NET NET VALUE is an insane Rm10.00!!)
YES!! A THOUSAND TIMES YES!!!
PAYING ONLY PENNIES FOR DOLLAR BILLS!!!
VALUE INVESTORS ARE DOING THAT ALL THE TIME LIKE BENJAMIN GRAHAM, WALTER SCHLOSS, WARREN BUFFET, NEOH SOON KEAN, COLDEYE, LIM PEI TIAM & ETC ETC!
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Huat ah
2018-01-10 22:15