This week on the One Minute Retirement Tip podcast, I’m exploring the question: Are Value Stocks Coming Back In 2021?

Today, I’m stating my case for value stocks. The S&P 500 is nearing 4,200 as I write this, and tech companies now make up 27% of the S&P 500 index. When just a handful of companies make up most of the entire tech industry in terms of size and influence over the returns of that sector, your portfolio is heavily influenced by the returns of just a handful of big tech companies, because tech now represents a disproportionate % of the total stock market. 

If you’ve been an investor of the S&P 500 index or had a lot of your portfolio in large cap growth and tech, you’ve been a happy investor for the last 10 years. 

But I think that may soon begin to change. Here’s the thing. The returns in growth stocks have been so steller, many of them are now at or above, many even far above their intrinsic value, and value stocks have started to become more loved as their recent outperformance compared to growth stocks has demonstrated. 

Researchers over at Vanguard recently published a paper on this topic. They think that value stocks will outperform growth stocks by 5-7% per year in the coming decade. And much of that outperformance they see coming in the next 3-5 years, with value outperforming growth by 9-13% per year.

Why the reversal? Part of the reason is what I talked about already this week - the reversion to the mean or a return to normalcy in the balance in returns between growth and value stocks over time. 

The thesis for value stocks is typically something like this: 

Buy quality businesses, with low debt, who are dominant in their industry. If that industry has barriers to entry and the business has pricing power and the flexibility to raise prices, all the better. Value companies tend to be consistently profitable and well-managed. Once you can check all those boxes  AND the stock is trading at a discount to its intrinsic value, then you have a winning formula for a quality value stock. 

Stock market returns haven’t rewarded these fundamental factors that drive business and stock price value. The only thing investors have cared about is the future growth potential of the business, without discerning all of the factors that are important to consider when investing.

And that’s why I think Vanguard researchers may be right in theorizing that value will outperform growth over the coming decade. Value stocks have been largely ignored, all the while, they’ve been strengthening their companies, without being rewarded in the stock price. 

That’s why I’m optimistic and excited for value stock investing to make a comeback. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip.

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