Look before leaping into value stocks

Value stocks' rout of growth stocks last year hasn't been lost on market prognosticators, many of whom are predicting a bright future for value versus growth this year.

But even though value beat growth last year, for the first time in 40 years, not all financial advisors are ready to board the value stock bandwagon.

“In our opinion, if you’re looking at an opportunity going forward, it’s not what has already done well,” said Tim Holsworth, president of AHP Financial.

For perspective, the trouncing of value over growth last year was really a matter of value losing less than growth.

Value stocks, as measured by the Vanguard Russell 1000 Value Index ETF (VRVIX), fell 7.6% last year and are up 2.1% so far this year. Growth stocks, as measured by the Vanguard Russell 1000 Growth Index ETF (VONG), fell by 29.2% last year and are up 0.7% so far this year.

Advisors like Holsworth can see the trend, but he isn’t convinced about the momentum.

“If I had to make a prediction, I’d say value will probably outperform growth during the first half of the year, but then I think it will turn and you’ll make it up in growth for the next two or three years,” he said. “I’m just not buying that value is where you want to be for the foreseeable future. I’m a big fan of technology, and you can’t have technology without being in growth.”

It is a statistical reality that betting on value would mean anticipating a rough stretch for such growth-oriented sectors as technology and communication services, but that’s exactly what popular forecaster Bob Doll, chief investment officer at Crossmark Global Investments, forecast in one of his 10 predictions for 2022.

“Energy, consumer staples, and financials outperform utilities, technology, and communication services as value beats growth,” Doll said.

Kevin Shuller, founder and chief investment officer at Cedar Peak Wealth Advisors, is in the same camp as Doll, noting that the “valuation spread between value and growth stocks is still at historically wide levels.”

“I think value is likely to show meaningful outperformance in the future and I want my clients to benefit from that,” Shuller said. “You still have exposure to all the growth stocks; they just get underweighted in the portfolio. Exposure to value stocks is a core tenet of my investment philosophy for clients. We usually have clients tilted toward value in both the U.S. and International equity sleeves of the portfolio.”

Risley Sams, founder and president of RHS Financial, also sees the value in value stocks.

“Value stocks have a place in everyone's portfolio,” he said. “They differ from growth stocks in that rather than paying a premium price for a stock and counting on continued growth, you pay a reasonable or perhaps an even cheap price and look for upside in the stock's upward move toward a more normal valuation and price. We are and have been buying value stocks in both foreign and domestic equities.”

Eric Roberge, founder and chief executive of Beyond Your Hammock, had a similar take.

“We believe in overweighting value stocks on a consistent basis, specifically, small-cap value, and that commitment doesn't change year to year,” he said. “As such, our portfolios did very well versus the global stock market and the S&P 500 index in 2022. Although U.S. large cap growth dominated for the past decade prior to 2022, we stayed committed.”

In terms of investors who might be shifting course to chase the hot dot of value, Roberge offers the standard advice against trying to time markets and market cycles.

“When the experts say value stocks are the place to be now, it's probably too late to make a tactical move into value stocks,” he said. “It's like when you buy the 10 best stocks of last year, this year. You've missed the boat.”