Value Stocks Poised For “Outperformance” Everywhere — GMO Report

For years growth stocks were hot, right up until they were not.

But lately value stocks have taken over in a big way. And what’s better for investors is the trend of outperformance of value versus growth will likely continue, experts say.

“As for the question of whether the value opportunity is over, it seems pretty clear to us that the answer is no,” states a recent report from financial firm GMO.

Value stocks are those that are priced modestly compared to the underlying metrics of earnings, cashflow and other key indicators of the company’s health.

“Growth stocks are those companies expected to grow sales and earnings at a faster rate than the market average,” according to Investopedia. They also tend to looks expensive when compared to value stocks.

In any event there’s been a recent rebound in value equities, while growth stocks, which include many tech companies such as Apple
AAPL
, Meta, and Google, have plunged.

For instance, the Vanguard Value Index (VTV
VTV
) exchange-traded fund was up 4.4% in the three months through November 30, according to Yahoo Finance data. Meanwhile, the Vanguard Growth Index (VUG
VUG
) ETF was down around 7% over the same period. In fact the latter roughly tracked the fall in the tech-heavy Nasdaq index, again according to Yahoo.

This outperformance looks like its only just begun.

The so-called valuation spread, which measures the difference in value metrics between growth and value stocks, is still at an historic low. The report explains, like so:

• “As of the end of September, value was trading at 0.72, which is the 11th percentile versus history. It’s certainly up from where it was a year ago, when we were at the 4th percentile versus history, but far from all the way back to normal.”

It continues by saying “long value/short growth remains our highest conviction position.”

So what should traders do?

If you buy in to the GMO analysis then buying value ETFs and selling borrowed shares of growth ETFs, might be a winning strategy.

For instance, you could purchase the Vanguard Value Index ETF, then sell borrowed shares of the Vanguard Growth Index ETF.

Normally, when traders sell short using borrowed shares, they hope to buy the stock back at a lower price to lock in a profit.

In this case, that doesn’t necessarily need to happen. All that is necessary to profit is that the value ETF gains more than does the growth ETF. In other words, if they both fall in value, the trade is still profitable as long as value stocks fall less than growth ones.

Of course, no one can know the future with any accuracy, and the period of low interest rates that fueled growth investing may return without warning. In that case its more than likely that the trade would not work. In simple terms, this trade could get risky and you could lose money.