Value stocks: A relatively secure market redoubt

Dave Gilreath: ©Sheaff Brock Investment Advisors

Before the steep stock market decline in recent weeks, a significant shift in investor sentiment was already underway—one that investors might want to consider in buying the dip.

This shift suggests that instead of buying too many tickets for the highly volatile growth-stock rollercoaster, investors should consider the case for increasing portfolio allocations to value stocks—those that are unloved by the market despite good fundamentals.

By contrast, growth stocks are those expected to grow earnings more rapidly, so they become priced up by the market and usually carry higher risk.

Value stocks’ characteristic role as a sensible, relatively secure equity redoubt is clear from how well it has held up in the decline. As of mid-day March 17, Vanguard Value EFT (VTV) was down only 2.17% over the preceding four weeks, and up nearly 2.5%, year to date.

In early February, there was already a strong case for investors to lighten up on the Magnificent Seven –-big tech growth stocks including Meta, Microsoft and Google—and to invest more in the other 493 companies in the S&P 500 index of U.S. large company stocks, value stocks among them. At this point, big tech and other growth stocks were weakening and underperforming the broader market.

Sea change

A sea change was occurring. Investor sentiment was turning against big tech growth. Scott Chronert, U.S. equity strategist for Citi Research, speaking on CNBC, described this shift at mid-month:

“Big growth stocks, the Magnificent Seven in particular—Nvidia is the poster child for this—have been living off a persistent… raised outward guidance for the better part of two years. What you’ve been seeing with Nvidia is a deceleration in that pace of upward revision… So essentially what you’re setting up for is a change in sentiment for how you’re pricing in longer-term growth expectations for the Mag Seven cohort.”

Integral to this shift was a souring investor view of these companies’ heavy, long-term capital expenditures on artificial intelligence—i.e., semiconductors.

Hyper-scaling aversion

After the Chinese company DeepSeek showed that AI applications can be devised using far fewer semiconductors than previously believed, many investors apparently came to look askance on so-called hyper-scaling—massive investment in microchips—by big U.S. tech companies including the Magnificent Seven. This view put pressure on big-tech stock prices.

Perhaps more impactfully, institutional investors were concerned that these companies’ revenue growth might not keep pace with their huge capital expenditures on semiconductors.

In buying the dip in the coming weeks, caution would dictate against repeating the error of weighting equity portfolios too heavily with growth stocks, especially big tech.

The antidote for the urge to splurge on growth stocks, even at fallen prices, is value stocks. Of course, critics of this view would argue that value stocks had been doing so badly that they didn’t have far to fall.

Yet, that view isn’t forward-looking. Enhancing the forward view of value stocks is the potential for earlier market performance broadening, from big tech to the rest of the market, to resume in a rebound. And in the event that likely near-term volatility brings more downs than ups, investors might find encouragement in value stocks’ recent demonstration as a safer port in a storm.

Low-risk value picks

Our firm screened 3,000 mid- and large-cap stocks with value characteristics for these criteria: lower downside risk than the S&P 500 regarding various fundamentals; lower risk than other stocks in their respective sectors; five-year volatility less than the S&P 500; a price/earnings ratio of less than 20—well below the S&P 500; and a dividend yield above that of the S&P 500 average.

These screens yielded 34 stocks from various sectors—primarily from communications services, consumer staples, financials, and health care.

Among those in this group with the highest average analysts’ projected annual earnings over the next five years are these five stocks:

Abbott Labs. (ABT). Trailing 12-month P/E as of late February, 17.4. Return on equity (ROE—a key performance metric), 34%. Dividend yield, 1.8%.

M&T Bank Corp. (MBT) Trailing P/E, 13.6%. ROE, 8.9%. Dividend yield, 2.7%.

Popular Inc. (BPOP), a mortgage and commercial lending company. Trailing P/E, 12.2. ROE, 11%. Dividend yield, 2.7%.

Allstate (ALL) Trailing P/E, 11. ROE, 22%. Dividend yield, 2%.

AlbertsonsCompanies (ACI) Trailing P/E, 14.9. ROE, 37.8%. Dividend yield, 2.9%.

When you mention value stocks, a common negative reaction is that they have an inconsistent record of delivering on periodic positive projections.

But whether this bad rap is off-putting depends on your expectations. Of course, value stocks can’t deliver the Magnificent Seven returns of 2024, but neither will the Mag Seven, likely, in 2025.

And besides, seeking high-flying returns (with high risk) isn’t the point of owning value stocks, especially now.

The point is to position for more secure returns and diversify portfolios while the market recovers—and to collect the good dividends that many of them pay.

It’s not a bullish move by any means, but it’s far less bearish than settling for the likely inferior returns of bonds.

Dave Sheaff Gilreath, CFP,^® is a founder and chief investment officer of Sheaff Brock Investment Advisors, a firm serving individual investors, and Innovative Portfolios,^® an institutional money management firm. Based in Indianapolis, the firms are managing assets of about $1.4 billion, as of December 31.
Investments mentioned in this article may be held by those affiliates,Innovative Portfolios’ ETFs or related persons.