Value investing proves fruitful for stock pickers

by Natalia Kniazhevich

Value investing has long been out of favor in US stocks and last quarter was no different, as an index of beaten-down shares badly trailed the broader market’s furious rally.

But it was also a time to shine for stock pickers focusing on downtrodden companies. Around 63% of active managers investing in cheap large-cap stocks outperformed their benchmarks in the second quarter, the best showing since the depths of the pandemic in 2020, data compiled by Jefferies show.

While most of the focus was on the megacap firms that led the stock-market rebound from its nadir in April, the money managers who knew where to look were able to uncover huge pockets of opportunity in value as well. Value fund managers swooped in on industrials firms, which rallied 11% last quarter — on par with with the S&P 500 — and stayed away from bond proxies like utilities, consumer staples and real estate, some of the worst performers in the Russell 1000 Value Index last quarter, Jefferies data show. 

The strength of the economically sensitive industrials sector in particular bodes well for the beaten-up value sector, leading some market watchers to anticipate broader strength from the cohort as growth remains solid and the outlook for interest-rate cuts brightens.

“We don’t think we’re going into an economic recession so with that value stocks should perform better,” Steven DeSanctis, equity strategist at Jefferies said. “And as we still expect three rate cuts in the back half of 2025, lower interest rates will also be very helpful for cyclicals and for value.”

Bargain Hunting

While value companies did worse than growth firms on an absolute level, value stock pickers reaped rewards relative to their benchmarks at a time when growth money managers stayed out of luck. Money managers focused on large-cap value names outperformed their benchmarks by 1.7 percentage points last quarter, while their growth peers trailed benchmarks by 0.3 percentage points during the same period, data compiled by Jefferies show.

The bargain-hunting ideology espoused by Warren Buffett lost its shine in the era of high-growth, high-risk big tech and artificial intelligence, but the approach shows signs of picking up. Over the past week, value has outperformed each of the 12 style factors tracked by Bloomberg.

The S&P 500 Industrials Index, which is comprised of companies that manufacture goods and transport them, is trading near its all-time high, driven by expectations that waning trade friction will help the US economy rebound.

The group is the top-performing sector in the index on a six-month basis, powered in part by a trade truce between the US and China and economic data that suggests the American economy remains resilient in the face of tariffs.

Another big contributor in value stocks gains is the financials sector, the third-best performer in the S&P 500 since January. Its most recent rebound came after a group of 22 large US banks cleared the Federal Reserve’s annual stress test, indicating they can withstand a severe recession and unleashing a bonanza of buybacks and dividends for shareholders.

The KBW Bank Index, a narrower benchmark which tracks the biggest US banks, has jumped nearly 40% from its low in April. 

Copyright Bloomberg News