Value Stocks Fall From Favor


Just because a variable like price/earnings ratio or Overall Quadrix score has worked well recently does not mean it will continue to work. But the effectiveness of such variables tends to be streaky, and knowing what's working can help put market moves in context.

The end of 2014 saw a shift away from value stocks, with investors rotating toward shares of faster-growing companies with strong fundamentals. You can't see this shift looking at 12-month holding periods. In fact, for the broad Dow Jones U.S. Index, the top one-fifth of stocks on Quadrix Value score has outperformed in 20 of the last 21 rolling 12-month periods.

However, in the last four one-month periods of 2014, top Value scorers underperformed while top scorers for Earnings Estimates, Momentum, and Quality outperformed. Overall Quadrix scores, which have outperformed in 20 consecutive 12-month periods, have worked in three of the last five one-month periods.

For the most part, individual Quadrix variables tell a similar story. Most of the core Value ratios, including P/E and enterprise ratio, have not worked in recent months after a long run of outperformance. One notable exception is the price/free-cash-flow ratio, which has worked in five of the past six months.

Implications for investors

Does it make sense to forsake the Value score, the most effective category score in Quadrix over the past 20 years, because of a four-month dry spell? Of course not. But Earnings Estimates, Performance, and Quality have been unusually streaky — meaning they tend to work best when they have been working recently — so this is probably a good time to be looking for values among timely names with good track records.

The Value Focus story lists 20 Quadrix standouts with high Value or Overall scores. Among these stocks, especially timely picks with good scores for Momentum, Quality, Earnings Estimates, and Performance include Foot Locker ($57; FL), F5 Networks ($128; FFIV), and Jones Lang LaSalle ($149; JLL).

While all these stocks have been buffeted by the market's rocky start to 2015, we view the pullbacks as buying opportunities. The primary trend is squarely in the bullish camp, as the Dow Industrials, the Dow Transports, and broader market measures reached all-time highs in late December. Our Focus List and Buy List have 94.2% in stocks, versus 87.5% for our Long-Term Buy List.

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