Value Stocks Gain Ground

8/26/2013


Stocks have been under steady selling pressure since early August, with value stocks slumping a bit more than growth stocks. The dip is weighing heavily on sentiment, with some arguing that value stocks are particularly sensitive to the threat of a global economic slowdown.

Companies with stocks that trade at comparatively low price/earnings and price/cash flow ratios tend to have less predictable earnings, so their relative share-price performance can be a useful barometer. But it is important to keep the pullback in perspective, as value stocks have rarely performed as well as in the 12 months ended July 31.

For the 12 months, the average stock in the broad Dow Jones U.S. Index delivered a 34.7% total return — higher than 91% of the 12-month periods since January 1992. The top one-fifth of stocks based on Quadrix Value scores returned 47.8% — higher than 94% of the 12-month periods. At 13.1%, the spread between Value standouts and the average stock was higher than 87% of 12-month periods.

While those numbers sound extreme, Value stocks have a history of streaky and extreme returns. In other words, the massive outperformance of Value stocks over the past year is not a reason to abandon Value now. Also, Value stocks have only recently begun to outperform after a long period of underperformance — and such performance droughts are often followed by robust relative returns.

To be sure, knowing the duration of such streaks in advance is impossible. History only indicates that such streaks are possible — and that Value-based strategies are likely to be volatile. Also, history suggests you can take steps to limit the risk of such strategies:

Commit to Value for the long haul. The longer your holding period, the more likely Value is to work. For example, the top one-fifth of stocks based on Value outperformed in 60% of the 12-month periods since 1992 and 79% of the 36-month periods.

QUADRIX SINCE 1992: OVERALL VERSUS VALUE
Based on a back-test of rolling 12-month periods since January 1992, an equal-weighted portfolio with all stocks in the broad Dow Jones U.S. Index delivered an average total return of 12.8%, versus 15.4% for the top one-fifth of stocks based on Quadrix Overall scores and 16.4% for the top one-fifth on Value scores. But the Value portfolio was volatile, so its average return/standard deviation ratio was not as favorable as the Overall portfolio. Similarly, based on geometric average return, a measurement that rewards consistency, the Overall portfolio was superior.
All Stocks In
Dow Jones
U.S. Index
Top One-Fifth
Based On Quadrix
Overall Score
Top One-Fifth
Based On Quadrix
Value Score
Simple average 12-mo. return (%)
12.8
15.4
16.4
Standard deviation (%)
20.9
19.7
26.3
Average/standard deviation
0.61
0.78
0.62
Geometric mean 12-mo. return (%)
10.8
13.6
13.5
Positive 12-month periods
192
204
191
Negative 12-month periods
55
43
56
Winning percentage (%)
77.7
82.6
77.3

Use Value scores in concert with other strategies. Value scores are heavily weighted in the calculation of Overall Quadrix scores. But Overall scores also reflect five other category scores, leading to less volatile returns, as shown above. Overall-based strategies have also done a better job of avoiding negative returns, partly because Value strategies are more correlated with the direction of the market.

Look for stocks that score well relative to sector peers, and make sure your portfolio is not overly concentrated in one or two sectors. Value scores measure all stocks using the same methodology, meaning a single sector will sometimes dominate a set of top scorers. But our sector-specific scores grade stocks based on what works best in a sector, allowing you to skim the cream of a high-scoring sector. Listed below are 10 attractive stocks with high scores for Overall, Value, and both of our sector-specific scores.

VALUE STANDOUTS WITH OVERALL APPEAL
Quadrix Scores
Sector Scores
Company (Price; Ticker)
Overall
Value
12-
Factor
Sector
Reranked
Overall
Sector
Subindustry
Aflac ($60; AFL)
93
97
86
96
Financials
Insurance
Apple ($501; AAPL)
91
93
92
93
Technology
Hardware
EMC ($26; EMC)
95
86
94
94
Technology
Storage
Express Scripts
($65; ESRX) 
83
86
90
93
Health Care
Services
Foot Locker ($35; FL)
94
91
64
76
Consumer
Discretion.
Apparel
Retail
Helmerich & Payne
($65; HP)
98
89
78
95
Energy
Drilling
J.P. Morgan ($52; JPM)
99
95
99
99
Financials
Diversified 
Kroger ($38; KR)
96
81
97
96
Staples
Food Retail
Lear ($71; LEA)
99
83
99
100
Consumer
Discretion.
Auto Parts
Wells Fargo ($43; WFC)
97
86
99
97
Financials
Banks

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