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Are Value Stocks Dead And Buried?
September 12, 2016

Are Value Stocks Dead And Buried?

Value stocks stink. At least, that’s what many investors think. Vanguard’s S&P 500 Index beat Vanguard’s Value Index over the past 3, 5, 10, 15 and 20 year periods ending August 31, 2016.

Over the past 20 years, Vanguard’s Value Index languished in the basement. Vanguard’s Mid-Cap Index, its Growth Index, its Small Cap Index and its Total Stock Market Index all kicked it down the stairs.

Growth of $10,000 20 Years Ending August 31, 2016

Fund Amount Invested Investment Grew To:
Vanguard Small Cap Stock Market Index (NAESX) $10,000 $57,816
Vanguard Mid Cap Stock Index (VIMSX) $10,000 $52,873
Vanguard Growth Stock Index (VIGRX) $10,000 $49,288
Vanguard Total Stock Market Index Fund (VTSMX) $10,000 $48,928
Vanguard S&P 500 Index (VFINX) $10,000 $47,522
Vanguard Value Stock Market Index (VIVAX) $10,000 $46,479

Small-cap value stocks have historically done well. But over the past 3, 5 and 10 year periods, they’ve also come up short.

Growth Of $10,000 Ending August 31, 2016

Past 3 Years Past 5 Years Past 10 Years
U.S. Small Cap Value $12,358 $17,538 $18,448
S&P 500 $14,164 $19,839 $20,628
Source: Morningstar.com, equity categories

Many value stock investors have long tossed in the towel. They’ve also behaved badly. They bought more after value stocks rose. They sold (or ceased to buy) when value stocks dropped. Over the 15-year period ending July 31, 2016, Vanguard’s Value Index Fund averaged a compound annual return of 6.43 percent per year. According to Morningstar, the average investor in that fund averaged an annual compound return of just 3.73 percent per year.

But smart investors shouldn’t bury value in the ground. In February of this year, I wrote that value stocks were cheap. Research Affiliates had examined 12 factor based fund categories. They included momentum stocks, low volatility stocks and stocks with high gross profitability. As investment styles, most had become quite expensive. But value stocks stood out. They practically had a label that screamed, “Massive Sale!”

According to Research Affiliates, PE ratios for value stocks had fallen 4.78 percent when compared to the overall market over the previous 10 years. At some point, value stocks will climb up from the grave.

It reminds me of the recent film, Batman versus Superman. In the end, the two join forces to kill a monster villain. Superman dies. His loved ones cry. They bury the cape crusader. But in the film’s final scene, the camera zooms in. The ground begins to shake before the credits start to roll.

The same thing could be happening to value stocks now.

This year, Vanguard’s S&P 500 is up 7.95 percent to August 30, 2016. Vanguard’s Value Index has gained 9.37 percent.

Vanguard’s Small Cap Index is up 10.9 percent. Vanguard’s Small Cap Value Index is up 13 percent.

I’m not trying to make a market timing call. Nobody can consistently do so. It’s best not to try. But every asset class will have its day or decade in the sun. That day often comes when the asset class looks dead.

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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.