Value stocks

Is it time to buy the 5 worst performing value stocks of 2021?

AAt first glance, this year seems to have been quite good for the market. From Tuesday, the S&P500 rose just over 23% in 2021, and it was once again within reach of a record.

Closer examination, however, puts a curious twist on the story. While the broader market may well be up year-to-date, a select group of growth stocks have done the vast majority of the heavy lifting. Value stocks underperformed, weighed down by stable companies such as Discovery (NASDAQ: DISCA), International paper (NYSE: intellectual property), and Universal health services (NYSE: UHS). These three stocks are in the red for the year so far, and they are not the only ones.

Image source: Getty Images.

This weakness in value stocks has some bargain-hungry investors licking their chops. Others remain disinterested, whether because they prefer growth or because they are keen to avoid stocks that are currently down, or both.

Every investment mindset has its merits. But whichever side of the fence you sit on, there’s something every investor should consider before 2021 turns into 2022.

A clear but curious underperformance

A picture, they say, is worth a thousand words. Well, a good chart too – like this one, which shows the S&P 500 Growth Index is up nearly 28% this year, while the S&P 500 Value Index is up a more modest 18% . Value stocks and growth stocks were in rebound mode after the early 2020 plunge that took shape when the COVID-19 threat reached pandemic status. In May 2021, however, value stocks simply abandoned the uptrend.

^ SPX Chart

^ SPX data by YCharts

It’s also not like a few weirdly weak players are exaggerating recent weakness in value.

International Paper, United Health Services and Discovery are posting year-to-date losses of 4%, 7% and 25%, respectively. Verizon (NYSE:VZ) and fedex (NYSE: FDX) took 14% and 8% hits, and they’re in good company. TV, healthcare, food and packaging stocks are particularly well represented among the most lagging large caps of 2021, although most of them have been able to increase their numbers business and their bottom line this year despite the economic turmoil.

Society Industry Trailing P/E PER before Share Price Change (YTD)
Dow Chemicals (NYSE:DOW) Chemical products 7.0 8.4 (2.9%)
International paper Packaging & containers 10.0 9.7 (4%)
Cummins (NYSE: CMI) Specialized industrial machinery 14.2 11.9 (4.6%)
Packaging Corp. from america (NYSE: PKG) Packaging & containers 16.7 14.0 (5.3%)
Comcast (NASDAQ: CMCSA) Entertainment 15.7 13.1 (seven%)
Universal health services Medical care facilities 10.3 10.4 (seven%)
fedex Integrated freight and logistics 13.4 10.8 (7.5%)
Cardinal Health (NYSE: CAH) Medical distribution 12.7 7.9 (8.6%)
Conagra Brands (NYSE: CAG) packaged food 13.1 12.3 (10.4%)
DaVita (NYSE: DVA) Medical care facilities 12.0 12.6 (10.5%)
Campbell Soup Company (NYSE: CPB) packaged food 13.7 14.6 (10.9%)
Verizon Telecom 9.5 9.4 (13.8%)
Leidos Holdings (NYSE: LDOS) Computer science 16.3 12.6 (16%)
ViacomCBS (NASDAQ: VIAC) Entertainment 6.3 7.7 (20.6%)
Discovery Entertainment 12.0 7.0 (25.2%)

Data source: FINVIZ (as of December 14, 2021). YTD = Year to date. P/E = price/earnings ratio.

It’s also worth noting that the recent tepid performance of value stocks is actually an extension of an underperformance trend that began to emerge in mid-2017.

^ SPX Chart

^ SPX data by YCharts

But, nothing lasts forever.

Imminent change

Of all the allocation-driven theories that investors can apply to their portfolios, the value-growth dichotomy rarely gets its due.

Maybe it’s just a matter of style. In other words, aggressive investors look for growth stocks regardless of the environment, while security-conscious investors also gravitate towards value stocks without worrying too much about macroeconomic conditions. Both groups of investors may make a point of diversifying across sectors or market capitalizations, but growth or value aren’t usually part of the stock selection regimen.

Big mistake. Style can clearly make a big difference in performance.

The coming year could well be the time when the multi-year pattern of growth stocks leading the market upside comes to an end, and leadership is ceded to value names. In any case, this is what Russell Investments expects. In their outlook for 2022, the fund management firm’s analysts say “above-trend growth and higher long-term interest rates favor cyclical and value stocks over technology and growth stocks.” “.

And Russell is not alone in this situation. Morgan Stanley Wealth Management chief investment officer Lisa Shalett also believes inflation and rising interest rates will benefit value stocks. Ditto for fund company GMO’s head of asset allocation, John Thorndike, who in the company’s third-quarter newsletter highlighted “the relative value opportunity for owning shares of value,” adding that they “have the advantage over the overall market and growth stocks.” And that’s just a small sample of professionals who expect things to be very different for value stocks now that inflation is on the rise and economic growth is stabilizing. This idea is underscored by the fact that last month’s annualized inflation for factories and manufacturing facilities hit a modern-era high of 9.6%.

Take the clue.

At least it’s a direction

Will the aforementioned five value stocks – or any of the other 10 listed in the table – be the leaders of the relative resurgence in value? Nobody knows for sure. Other value stocks may fare better. These five names could continue to struggle.

However, from a risk-return perspective, the fact that the underlying business of the most battered value stocks is still doing well makes it a very compelling outlook for 2022. If nothing else, it’s an excellent place to begin your necessary checks.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends FedEx. The Motley Fool recommends Comcast, Cummins, Discovery (C-shares) and Verizon Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.