Investors are tribal.
I’ve never understood it. As a trader, I’m more interested in making money than in being “right.” And even though I make my living discussing investment opportunities, I’ve never felt the need to convince people to see things my way.
I let the numbers do the talking instead.
Yet, most investors are different. They get married to a certain investment ideology. It becomes something between a political ideology and a dogmatic religion for them.
I’ve met plenty of investors that believe that value investing is the one true investment method, as revealed by the writings of Benjamin Graham or the annual meetings of Warren Buffett’s Berkshire Hathaway. And I’ve plenty of others that believe that anything other than aggressive growth investing is apostasy.
Here’s the thing.
Value investing works. My research and that of countless others proves it.
But so does growth investing. My research proves this this as well. This is why I include both value and growth factors in my proprietary six-factor Green Zone Ratings system. Why would I choose growth or value when I can enjoy growth and value?
A Resurgence in 2022?
Higher interest rates will hit future growth of certain stocks.
I’ve given my value factor more attention lately, because I believe we’re entering a period of strong value-stock outperformance relative to the rest of the market.
With the Federal Reserve now committed to raising interest rates to fight inflation, the cost of capital will rise. That rewards mature cash cows with high earnings today versus companies whose value is based on expected cash flows many years in the future.
We’ve seen this before.
Tech-centered growth stocks dominated the stock market in the late 1990s. But when the dot-com bubble burst, value stocks enjoyed their moment.
The iShares S&P 500 Value ETF (NYSE: IVE) launched just as the great 2000bear market was getting underway. Yet by late 2007, the ETF was up by about 50% after taking dividends into account, and that includes its whole ride through the bear market that ended in 2003.
Value investors earned fantastic returns at a time when the broader market suffered. I can’t promise you that we’ll see a repeat of this today. But I like the odds.
The Best Value Stocks Aren’t Just “Cheap”
Sometimes stocks are cheap for a reason. They might be cruddy companies at risk of financial distress, or they might be operating in dying industries.
This is why my value factor is only a starting point. It’s important that we also look for solid growth and quality ratings. If a stock rates a full 100 out of 100 on my value factor but rates a 5 on my growth or quality metrics, I’m not interested.
Momentum plays a role here, too. As a general rule, I’m not a fan of catching the proverbial falling knife. If a stock’s price is trending lower, there’s a good chance its fundamentals will follow it south soon enough. That’s why I wait for an uptrend to be in place, And my momentum factor helps us spot those stocks that are primed to “buy high … sell higher.”
And speaking of that…
In my February issue of Green Zone Fortunes, I’m recommending a stock that’s priced as one of the best bargains in the market. My research tells me it has incredible quality metrics with an excellent growth runway in front of it.
My team is putting the final touches on this issue, and it will hit Green Zone Fortunes subscribers’ inboxes soon!
If you want to subscribe before I send this value stock recommendation with market-crushing potential later this month, click here.
To good profits,
Adam O’Dell
Chief Investment Strategist