Value stocks

What value stocks are paving the way for growth?

Soaring oil prices grabbed headlines and, in doing so, fueled a rally in energy stocks that was an important driver of the rebound in value-oriented investment strategies.

But it’s not just the energy sector that’s driving the resurgence in value relative to growth stocks. Health stocks such as AbbVie (ABVV) and defensive consumer stocks such as Costco (COST) also contributed to the stock’s outperformance. Despite the better performance of value stocks over the past year, most are not in overvalued territory, with the exception of oil and gas drilling stocks.

In nine of the past 10 calendar years, growth has exceeded value. The tables started to turn in favor of value in 2021, and the first quarter of 2022 only solidified this trend.

The Morningstar US Large Value Index rose 1.6% in the first three months of 2022, a small gain, but one that beat the Morningstar US Growth Index by nearly 15 percentage points. This is the largest gap between value and growth since the first quarter of 2009.

For the twelve months ending March 31, the Morningstar US Value Index returned 12.8%, beating the Morningstar US Growth Index by approximately 5 percentage points. During this period, the value also outperformed the Morningstar US Core Index, which is comprised of stocks ranging between value and growth.


Much of the attention of investors has focused on the huge gains seen in the stocks of companies that produce oil and gas. When oil prices were in a multi-year downtrend, these stocks, which land primarily in the value category, languished. But as oil has rebounded over the past year, and with names like Exxon Mobil (XOM) With a rally of 36.4% in the first quarter and 56% for the last 12 months, value stocks as a group have seen a strong increase.

The healthcare sector, led by AbbVie, contributed a quarter of the stock’s strong performance over the past year. AbbVie increased by 21% in the first quarter and by 57% in the last 12 months. Defensive consumer stocks, which provide basic retail goods and tend to be less sensitive to changes in the economy, have contributed 15% to total stock return over the past year.

Value stocks versus growth stocks

Morningstar assigns each stock a “style score.” These stock scores are relative, with companies ranking in Morningstar’s Value, Basic and Growth categories. Stocks are also ranked separately by market value for small, mid and large caps.

The style score is based on metrics such as earnings, sales, book value, and cash flow growth rates. In addition, it takes into account dividend yields and relative valuations such as price to projected earnings, price to book value, price to sales and price to cash flow.

Growth stocks have higher readings on earnings and sales ratios, for example, and low dividend yields. Companies that land on the lower end of the spectrum on these metrics land in the value category, and those in the middle are considered “essential.”

The question of where a stock lands in the style box is different from its valuation based on where Morningstar analysts set the stock’s fair value. Conoco Phillips (COP)for example, lands in the high price category, but after rising more than 90% over the past year to over $97, it is now considered expensive relative to Morningstar’s fair value estimate of $80.

Which sectors led the rally in value stocks?

Of the 12.8% rise in the US Morningstar Value Index, energy stocks were behind 4.3 percentage points. In addition to Exxon’s rally, Chevron (CLC) rose 63.1% and ConocoPhillips gained 95.1%.

Healthcare companies, meanwhile, contributed 3 percentage points to the stock’s return. At the industry level, the largest gains came from general drug makers (up 23.7% as a group) and health plan providers (up 31.2%) . This included a 48% gain for Pfizer (EFP)and a 38.9% 12-month return for UnitedHealth Group (A H). The first quarter was not as strong for these names. Pfizer lost 11.7% and UnitedHealth rose 1.9%.

Defensive consumer companies contributed 1.9 percentage points to value gains over the last twelve months, led mainly by Costco, up 64.5%, and consumer goods heavyweight Procter & gamble (PG)which gained 15.6%.

The 1st quarter consolidated the value trend

Even in a volatile market, value stocks stayed afloat as a group, hovering around zero for most of the quarter. While the US Growth Index was down 23.4% year-to-date at its worst, the Morningstar US Value Index was down just 2.7%.


In the first three months of this year, high-growth communications services stocks dragged the big growth index down. netflix (NFLX) lost 37.8% and Disney (SAY) was down 11.5%. While tech stocks ended the quarter among the worst performers, many names recovered from the worst of their losses. Microsoft (MSFT)for example, ended the quarter down 8.1%, after falling nearly 18% in early March.

Value stocks aren’t too expensive yet

Although the stock outperformed the rest of the market, the group managed to avoid entering overvalued territory. The Morningstar US Large Value Index posted an average price-to-fair value ratio of 1.00 based on Morningstar analysts and quantitative calculations. At the end of last year, the index was overvalued by 3%.

Valuations of growth stocks have also cooled since the start of the year. The Morningstar Large Growth Index ended the quarter in fair value territory, with an average price-to-value ratio of 0.99. That’s down from its year-end valuation of 1.17, which was 17% above fair value.

Small growth stocks ended the quarter at a 10% discount to fair value on average, with Beyond Meat (BY NA) and Boston beer (SAT) both hovering around a discount of around 50% to analyst-assessed fair value. And small caps ended the quarter at a discount across the board – Macerich Small Cap Real Estate Investment Trust (MAC) ended at only 55% of its analyst-assessed fair value. In the Morningstar small blend index, some of the biggest discounts include cable TV provider Altice USA (OURS)trading at 44% of fair value at the end of the quarter, and car dealership Asbury Automotive Group (ABG)trading at 69% of fair value.

Correction: The Morningstar US Large Value Index beat the Morningstar US Growth Index by 15 percentage points in the first three months of 2022. A previous version of this story incorrectly stated that the difference between the two was 15% .