It takes courage to be a valuable investor these days. But high-yield investment newsletters are not lacking in courage. By value, I mean stocks that are no longer used, trading at relatively low price / earnings, book value, sales, etc. ratios. The opposite value is growth: stocks in the latter category are generally traded at high valuation rates.
I’m not kidding when I say that investing in value requires courage. According to a Analysis of recent research affiliates, the stock has dampened growth for more than 13 years, the longest period in the history of the American market. This has led to a seemingly endless series of claims in recent years that value investing is dead.
Lily: What happened to value stocks?
Try saying so in the most profitable investment newsletters followed by my performance audit firm Hulbert Financial Digest. These four actions are linked because they are currently the most recommended by these bulletins:
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• Walt Disney
DIS
• FedEx
FDX
• IBM
IBM
• JPMorgan Chase
JPM,
Notice the absence of so-called FAANG stocks that have dominated the market in recent weeks.
Instead, the four stocks are solidly in the “value” category: their average PE ratio over 12 months at the end, for example, is 35% lower than that of the S&P 500.
SPX
. Its average price / book ratio is 26% lower and its average price / sale ratio is 10% lower. (See the table below). And given their market value status, it is not surprising that they have fallen behind lately.
Newsletters recommending these four actions have excellent long-term performance. I estimate that over the past 20 years (until April 2020), they have outperformed the S&P 500 by 3.2 percentage points annualized. (These figures take into account dividends and transaction costs.)
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An opportunity to buy good quality stocks at reduced prices.
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The justification for the purchase slips for these shares is the same in all cases: despite the short-term disruptions due to the coronavirus pandemic, each of the four companies has excellent long-term prospects. Their current difficulties give investors the opportunity to buy good quality stocks at reduced prices.
This is, and always has been, the classic refrain of value investors, of course. Is there any reason to believe that faith in the newsletters in these actions will be rewarded, even if the value has been behind for 13 years? Yes, and one of the reasons is the excellent long-term subscription of these newsletters.
Another is what was found in the aforementioned research affiliate study created by Rob Arnott, the company’s founder; Campbell Harvey, professor of finance at Duke University; Vitali Kalesnik, senior member of the research affiliate investment team, and Juhani Linnainmaa, professor of finance at Dartmouth College. They subjected all the explanations they knew why the value has been slowing growth for so long to statistical scrutiny, including:
- The value effect never existed in the first place, and evidence to the contrary is the result of data mining;
- The economy has fundamentally changed, making the value factor irrelevant in the future, such as technological innovation, low interest rates and the growth of private capital;
- Too many investors have tried to track the value factor, thereby excluding what would have been their best return to growth;
- Investors have shown a preference for growth stocks, which make them more expensive and value stocks cheaper than ever;
- Intangible assets that are not included in the carrying amount have become increasingly important for the profitability of a business;
- Bad luck.
It is not within the purview of this column to review the statistical tests that the authors used to analyze each of these explanations, but you should read your report If you are interested. They rejected these assumptions which would imply that the value is definitely dead and instead concluded that “the stage is ready for a performance potentially higher than the historical value compared to the growth of the next decade”.
If so, high yield investment bulletins will have the right to say “I told you so”.
(Full disclosure: all newsletters reported by my performance monitoring company pay a fixed fee for their statements to be verified. Please note that since all newsletters pay the same rate, my company was not encouraged to report that services that recommended value stocks had better long-term performance results than those that recommended growth stocks).
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert notes follow investment bulletins that pay fixed costs to be audited. He can be contacted at [email protected]
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