Deep Dive: Apple has soared out of the value realm, but you may still be able to find success on this stock list
It’s happening again: The financial media is touting a potential shifting of investors to value stocks from the growth stocks that have propelled the extended bull market in the U.S. This last happened in September and October, though the value buzz ended up being short-lived.
Now the steady rally in stock prices over the past several months has driven the S&P 500 index
for one, has had one of the biggest shifts in valuation in the last three months.
Wall Street has its own group of favorite value stocks, listed below. What matters most, of course, is your own opinion — is it time to shift to a value strategy?
The new arguments for value
The tremendous gains for U.S. stocks over the past year haven’t been propelled by earnings growth — analysts estimate that earnings per share were essentially flat for 2019. Investors simply have been willing to pay more for U.S. assets, as the Federal Reserve has switched its policy to lowering interest rates and increasing other stimulative activities, and central banks in Europe and Japan have maintained negative-interest-rate policies.
Mark DeCambre digs into the nervousness of professional investors as the market sentiment has turned “irrationally bullish.” Chris Matthews shows that the S&P 500 index
Among the questions to consider before shifting into value are how long you believe central-bank-driven growth can last and whether U.S. corporate earnings can grow enough over the next year or two to bring down P/E ratios.
Apple exits the value camp
Back on Oct. 22, I listed sell-side analysts’ favorite stocks in the S&P 500 Value Index. That and the S&P 500 Growth Index are overlapping subsets of the full S&P 500.
At that time, Apple was part of the S&P 500 Value Index. The index is rebalanced quarterly, and now Apple is out. This chart explains why:
Apple’s forward price-to-earnings ratio has increased dramatically to 26.7 from 20.5 three months ago. A year ago, the forward P/E was only 13.2.
The prospect of an improved trade relationship with China is an obvious positive for Apple. Then again, the 10-year price-to-earnings chart for the stock shows how the valuation has ebbed and flowed through product-release cycles:
Apple’s forward P/E valuation has typically been much lower than it is now. This is why it was included in the S&P 500 Value Index only three months ago, while other tech giants, including Microsoft
Value has trailed considerably during the long bull market. On this chart, the S&P 500 Value Index leads the Growth index and full S&P 500 only for the 20-year period.
How long can the central-bank-driven growth last? Will U.S. corporate earnings grow enough over the next year or two to bring P/E ratios down? These are among the questions you need to consider before shifting strategy.
A new list of Wall Street’s favorite value stocks
The S&P 500 Value Index is made up of 391 stocks drawn from the S&P 500 by S&P Dow Jones Indices, based on price-to-book-value, price-to-earnings and price-to-sales ratios.
These are the three most liquid exchange-traded funds tracking the S&P 500 Value Index, according to FactSet: