Time has come again for value stocks as gains far outweigh modest investment
BRIAN Belski, the chief investment strategist at New York-based Oppenheimer, was a believer in value stocks long before he took up his present position in 2009 -- but he believes their time has come (again).
"There is still time for value stocks to shine," he told clients recently.
Gains in these shares, which cost relatively little by comparison with earnings, sales and asset values, have exceeded those of companies with the biggest profit and revenue increases since the current US bull market began 22 months ago.
The chart to the right illustrates this performance by comparing the Standard & Poor's 500 pure-value and pure-growth indexes, consisting of S&P 500 companies that best fit into the two categories.
While both gauges surpassed the benchmark's 88pc advance from its March 2009 low, the value- stock index was 91 percentage points ahead of its growth-stock counterpart, as shown in the chart.
Value stocks are typically more rewarding than growth shares for about three years after the market hits bottom, Belski wrote last week.
"We will prefer growth strategies again when earnings growth gets scarcer," he added.
Analysts expect S&P 500 profits to increase 14.4pc this year, down from 31.6pc last year, according to data compiled by Bloomberg. Further slowing, to 11.7pc, is anticipated in 2012.
In general, Belski is starting to sound a bit more cautious about the market. This is striking because he has a good track record.
Belski was bullish earlier than many as the market took off in the past couple of years, but was also more bearish when the downturn began three years ago.
He is warning investors not to fall too deeply in love with what's worked well in the past year, and hunt instead for forgotten stocks that will outperform this year as the market's recent gains give way to a more uneven market performance.
Belski screens for bargains using the following criteria: negative price performance in 2010; a forward p-e that is below market; expected earnings-per-share growth greater than market in 2011 and free cash yield greater than dividend yield.
This leads him to invest in financials such as Bank of America, Goldman Sachs and JP Morgan. Also on the list are some technology stocks, including Cisco, Micron, Western Digital and Expedia. Stocks he is avoiding include McDonald's, energy companies such as Nobel Energy, Spectra Energy and National Oilwell Varco.