The pricing gap between growth and value stocks is its widest in 70 years, an AB Bernstein study found, meaning today would be a great time to scoop up the cheapest shares—in anticipation of a reversal of their fortunes.
That time will come at some point, history suggests. And the dynamic of costly stocks getting more expensive and cheap ones getting cheaper is an opportunity to be exploited, the Bernstein study contended. Already this year, value has shown some evidence of a comeback.
“Value as a style tends to perform better than average when there have been extreme troughs in the earnings revisions balance series, particularly 6 to 12 months following the point of most aggressive downgrades,” wrote Bernstein’s Inigo Fraser-Jenkins. Numerous other studies have found that, over the long haul, value investors come out ahead because, once their overlooked gems get attention, the upside is the most lucrative.
There’s an argument that lately growth stocks, as embodied by the famous FAANG tech quintet, have been riding more on momentum than fundamentals. Earning downgrades, in particular regarding growth stocks, are rife these days for 2019’s first quarter. Earnings projections for the S&P 500 are down 6.5% in the year’s first two months, according to FactSet Research.
“Although we think analyst estimates for 2019 and 2020 globally still have further to fall,” Fraser-Jenkins wrote, “the recent earnings season might have marked a low point in terms of the intensity of downgrades. We show value outperforms after such points.”
When earnings slowed in late 2018, the market suffered, and especially growth stocks. They’ve sprung back thus far this year, but the earnings expansion they feed on doesn’t appear to be there.
To Bernstein, examples of value stocks that have a lot of inherent strength, and thus potential to do well going forward, include General Motors, Bayer, and Credit Suisse. In the firm’s parlance, these stocks are “cheap per unit fundamentals.”
The last time value stocks were on top was from the end of the dot-com bubble at the start of the last decade until the 2008 financial crisis. Then, as the post-crash economy gradually gathered steam and the tech titans commanded the board, growth romped.
But as the old Wall Street adage goes: Trees don’t grow to the sky.
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