While growth stocks have led the market over the last decade and a half, there’s never been one particular investing style that is a permanent, surefire approach—which is why many analysts and investors believe that value investing is due for a comeback, contends an article in Fidelity.
Value stocks—high-quality companies selling at lower valuations—outperformed growth much of last year, with the Russell 1000 Value Index beating its growth counterpart by 20%. That performance hasn’t repeated itself in 2023, but many investors believe value’s underperformance this year is simply a momentary setback in a long comeback for value leadership. Traditionally, value outperforms growth over extended periods of time, and managers at Fidelity have highlighted well-priced value stocks that have the potential to do very well during a downturn, the article reports.
Growth’s dominance over the last 15 years was fueled by the mega-cap companies known as the FAANGs, but the market surge that happened at the height of the pandemic pushed the valuation gap between growth and value stocks to “extremes,” says Matt Friedman, who manages the Fidelity Value Strategies Fund. And global events like the pandemic often provide a catalyst for a shift in what’s leading the market—i.e., a reversal from growth to value, Friedman adds. Though nothing is ever certain, investors might want to take a look at value now.
One area that could hold untapped opportunities is the financial sector, which is still seeing fall-out from the banking crisis earlier this year. Among regional banks, many are quite robust and well-managed, but seeing their stocks negatively impacted as investors shy away from the sector; Friedman highlights M&T Bank Corp. and First Citizens BancShares Inc. in particular. Other financial institutions worth considering are those that benefit from higher interest rates, such as the insurance industry, which collects premiums and can then put that money back into investments at higher rates; Friedman pointed out the venerable insurer Chubb among those in this niche, according to the article.
While major indexes use price/earnings or price-to-book value ratios to separate growth from value stocks, the manager of Fidelity Value Discovery Fund, Sean Gavin, applies a different strategy, seeking out stocks that are trading low enough under their intrinsic value (according to his calculations) to provide a broad margin of safety. And especially when the U.S. economy in the latter stages of a cycle—as it is right now, the article contends—Gavin leans towards companies that are more stable and less sensitive to economic changes, such as the healthcare company Cigna Group and PG&E Corp.
Indeed, the energy sector is poised for “a good…cycle,” Friedman maintains, given the deficit in the sector of long-term investments for nearly a decade and the length of time it takes to bring a new energy project to fruition. In the article, Friedman highlights Canadian Natural Resources and Imperial Oil as two companies that have made major investments to depress cash flows, which could then gush if energy prices stay high.