Value Stocks So Cheap – We Can Only Hope Now Is Like March 2000

Here’s a great article at Forbes written by John Buckingham, Chief Investment Officer of Al Frank Asset Management, that reports some positive signs for value investors.

The five trading days just completed was our kind of week, as despite another missile fired over Japan by North Korea, the equity markets moved nicely higher, with the major market averages again hitting all-time highs and Value having a little time in the sun. Indeed, the Russell 3000 Value index advanced 2.24%, compared to a 1.18% increase in the Russell 3000 Growth index and a gain of 1.63% in the S&P 500. No doubt, investors were relieved that Hurricane Irma did not pack as powerful a punch in Florida as initially feared…

…but Value’s outperformance was, not surprisingly, correlated with a spike upward in interest rates,…

Bloomberg Finance

Big Rebound in Interest Rates

…which was precipitated by an easing of investor fears and, perhaps more importantly for the long term, an increase in the outlook for inflation…

Bloomberg Finance

Inflation Shows A Modest Pickup

…which should keep the Federal Reserve on track to again hike its target for the Federal Funds rate,…

Bloomberg Finance

Futures: Fed May Not Be Finished in 2017

…an occurrence that historically has boded well for the kind of stocks that we have favor, both in the short term…

Bloomberg Finance and Professors Eugene F. Fama and Kenneth R. French

Change in Fed Funds Rate

…and in the long term!

Bloomberg Finance and Professors Eugene F. Fama and Kenneth R. French

Fed Liftoff & Value

Certainly, anything can happen as we move forward, and we remain in the seasonally less favorable September/October time period, but we continue to see no reason to alter our long-term enthusiasm for our broadly diversified portfolios of undervalued dividend payers. And on the subject of Value, it was nice to see Mark Hulbert (one of the smartest analysts/columnists we know!) write last week, “Value stocks are now cheaper than ever — with only one exception.

That exception came at the top of the internet bubble in early 2000. Few investors remember that in the subsequent bear market, in which the S&P 500 lost 49%, many value stocks actually rose in price.

Value stocks, of course, are those that are most out-of-favor among investors, as indicated by a low price-to-book ratio. They are the opposite of growth stocks — those that trade with the highest such ratios.

Consider the spread between the valuations of the average growth and value stock. According to an analysis provided to me by Kent Daniel, a finance professor at Columbia University, the average large-cap value stock’s price-to-book ratio is barely half that of the average among large-cap growth stocks. Among small-cap stocks, value is even cheaper relative to growth.

This spread is much wider than average. Since 1959, according to Daniel, the average value stock’s price-to-book ratio has been only a third less than that of the average growth stock. The only other time when value was any cheaper than now came as the internet bubble reached its peak. Then, average value stock’s price-to-book ratio dropped to even less than half that of the average growth stock.

This wide spread between growth and value is of more than just idle significance. Researchers have found that value stocks tend to perform particularly well over the ensuing 15 years, relative to growth stocks, whenever — like now — the value spread is widest.”

As Mark Twain once said, “History doesn’t repeat itself, but it does rhyme!”