© Reuters. Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 29, 2024. REUTERS/Brendan McDermid
Written by David Randall
NEW YORK (Reuters) – Amid the current excitement surrounding artificial intelligence on Wall Street, some investors are opting for undervalued stocks outside of the tech sphere.
Value stocks, which are traditionally companies trading below their intrinsic value based on metrics like book value or price-to-earnings ratios, have taken a backseat as AI-driven growth stocks dominate the spotlight.
Yet, some sectors like industrials and materials, which are usually home to value stocks, have been making significant gains recently. This suggests a broader market rally beyond the high-flying tech and growth sectors.
Que Nguyen, chief investment officer of equities at Research Affiliates, highlighted the long-term advantages of investing in value stocks. Many of these companies have undergone rigorous restructuring processes and have attractive valuations.
Although the S&P 500 has reached record highs with a 7.7% increase so far in 2024, the S&P 500 Value Index has only risen by 3.3%, trailing behind the 11.6% surge in the S&P 500 Growth Index. However, certain value-heavy sectors have shown promising growth in recent weeks.
For instance, the industrial sector of the S&P 500 saw a 7.1% increase last month, driven by the performance of companies like General Electric and Howmet Aerospace. The materials sector also gained 6.7% in February, led by Vulcan Materials and Ecolab. In the consumer discretionary sector, which includes companies like Chipotle Mexican Grill and Ralph Lauren, there was an increase of nearly 9%.
One of the main attractions of value stocks is their relatively lower valuation compared to the broader market. Sectors like health care and energy are trading at much lower forward earnings multiples compared to the S&P 500.
Michael Hunstad, Northern Trust Asset Management’s deputy chief investment officer and head of global equities, expressed concerns about the steep multiples of the S&P 500 and the ‘Magnificent Seven’ group of growth and technology stocks that have been driving the market rally. He believes that value stocks could be a safer bet during times of elevated interest rates due to their more manageable cash flows.
While there is still anticipation for rate cuts by the Fed, investors are now less optimistic about the extent and speed of these cuts. Hunstad has been increasing his exposure to value-focused sectors like healthcare and energy for added stability.
Investors are becoming more cautious about the unpredictability of high-flying tech stocks, such as Tesla, which have experienced significant declines in value this year. This shift in sentiment is leading to a renewed interest in undervalued stocks that could provide a buffer against market volatility and rising interest rates.
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