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Value Stocks Are Back on Top

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I can’t believe it’s been 18 months since I first said value stocks were overdue for a run of outperformance.

Back then, in September 2020, value stocks had just experienced a terrible run.

From the start of 2017 through September 2020, the iShares Russell 1000 Growth ETF (NYSE: IWF) had doubled.

Against that, the iShares Russell 1000 Value ETF (NYSE: IWD) had stayed flat.

Chart: Growth's Epic Run

Value stocks had been crushed by growth stocks going into the COVID-19 pandemic. And coming out of lockdowns, the gap only widened.

After this underperformance, I believed that we had another clear buying opportunity on value stocks in September 2020.

Since that call, value has outperformed growth by 50%.

Chart: Value Has Led Growth Over the Past 18 Months

The iShares Russell 1000 Value ETF has gone up 37% while the iShares Russell 1000 Growth ETF has gone up 25%.

Interestingly, almost all of value stocks’ outperformance has taken place since the beginning of 2022.

While growth stocks have collapsed in 2022, value stocks are holding solid, which often happens when the market gets bumpy.

Chart: Growth Stocks Have Taken a Beating in 2022

What has happened in 2022 is common.

Growth stocks – which are stocks that are valued at exceptionally high multiples of sales, earnings and cash flows – have a lot of room to fall when exuberance gets sucked out of the market.

Value stocks, which are less richly priced, have much less downside.

Growth vs. Value – Where Do We Go From Here?

Value has taken the lead over the past three months.

And there’s no reason to think value’s reign of outperformance will be short.

History has shown us that value stocks tend to be the best stocks to own.

According to data compiled by professor Kenneth French of Dartmouth College and Nobel laureate Eugene Fama, from 1927 to 2019, value stocks outperformed growth stocks 93% of the time over rolling 15-year periods.

That’s an amazing statistic.

Furthermore, French and Fama found that value stocks have outperformed growth stocks by 4.39% per year on average since 1927.

That data makes it clear that investors should keep a portion of their portfolios allocated to value…

Especially now, given that the cycle seems to have turned back in value’s favor.

Even so, I think the sell-off in growth stocks is also creating some nice buying opportunities.

So far in 2022, I’ve identified Pinterest (NYSE: PINS) and Meta Platforms (Nasdaq: FB) as beaten-down growth stocks that offer compelling value.

With growth stock valuations falling and value stocks remaining attractive, we have a chance to build out a fully diversified portfolio.

Growth and value – there is no reason you can’t love both!

Good investing,

Jody

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