Value stocks

Value stocks still have upside potential

VTheir stocks are beating their rivals this year, and although the gap between the two is narrowing, some market watchers believe there is still fuel in the value tank.

This could be an advantage for exchange funds like the VanEck Vectors Morningstar Wide Moat ETF (MOAT). MOAT, which tracks the Morningstar Wide Moat Focus Index, is not a dedicated value fund, but one of its aims is to find wide moat stocks trading at attractive valuations, which makes it relevant in the conversation about value.

Value stocks typically trade at low prices relative to their fundamental values. At the start of 2021, in Value Investing: Is This the Biggest Opportunity Since the Tech Bubble?, we showed that value has become as cheap relative to their macro-sector peers as it was at the height of the tech bubble in 2000,” according to BNP Paribas Research.

Year-to-date, MOAT has outperformed the S&P 500 by more than 500 basis points, indicating there is value in the combination of wide-moat names at attractive valuations. Part of MOAT’s advantage is that it’s underweight tech stocks relative to broader benchmarks, but the VanEck fund still allocates a quarter of its weight to tech.

Fortunately, valuations are falling in technology. Equally important is the fact that technology holdings MOAT – Microsoft (NASDAQ:MSFT) being a prime example – are displaying quality characteristics. Quality stocks are often less volatile than their lower quality counterparts, a relevant consideration in today’s turbulent market environment.

It’s clear that the markets are showing a preference for quality, and stocks that don’t fit that bill are some of this year’s worst offenders. This is something to consider especially if value gaps are widening.

“A typical catalyst that can begin to widen the value gap is an increase in the difference between the expected earnings growth of value stocks and that of the most expensive stocks, as happened from mid-2018 to the end of 2020,” added BNP Paribas.

With a third of its weight devoted to defensive names in healthcare and consumer staples, the former of which are undervalued in the eyes of some experts, MOAT could be ideally positioned to further strengthen value stocks in the latter. semester 2022.

“With this in mind, and given that value spreads are still relatively wide, we expect value stocks to outperform their more expensive peers in each macro-sector above average as the most likely medium-term scenario. term”, concluded BNP. Paribas.

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