Trading Nation

A startling fact shows why value stocks may be your best pick now

Trading Nation: Growth vs. value in the 2nd half
Trading Nation: Growth vs. value in the 2nd half

So far this year, indexes tracking growth stocks have performed much better than those tracking value stocks. But that trend appears to have shifted in the past month, and some strategists think it's wise to play for a big value comeback.

Growth indexes — which track the subset of companies that have seen sharp growth in sales and earnings — are largely composed of tech stocks, whose shares have risen considerably over the past year.

Value indexes — which track stocks with low prices relative to their earnings, sales and book values — now have outsized holdings of financial and energy stocks.

The recent tumble in big tech stocks amid a generally stable market has been a boon for the relative performance of value stocks.

"At mid-year we are starting to see signs that investors are diversifying back into value stocks since growth performance started to wane in June," S&P Global portfolio manager Erin Gibbs said Friday via email.

She also points to a striking fact that turns the whole growth-versus-value debate on its head: The S&P 500 growth index is expected to see overall earnings per share growth of 7.7 percent in the second half of the year, while the S&P 500 value index is expected to see earnings growth of 14.1 percent.

"I know that doesn't really make sense — like, why would you have higher earnings growth for a value index, and why is it named growth? But, you know, this is all about forward looking growth, not the past," while the index components are chosen based on past growth, Gibbs said Friday on CNBC's "Power Lunch."

In addition, she noted, despite having a better growth outlook, the value index has "more reasonable valuations by historical metrics."

All in all, value stocks are "well-positioned for the balance of 2017," Gibbs concluded.

David Seaburg, head of equity sales trading at Cowen & Company, agrees that the gap between 2017 value and growth performance could close further. However, he added, this is "more because of the positioning in the environment" as investors look to back away from the crowded growth stocks.

Still, while Seaburg said that the growth indexes will take "a near-term pause, [and move] maybe a little lower... you buy it toward the end of the year."

"I do not think growth is dead," Seaburg said.

The term "value stocks" has come under some criticism lately. A paper called "Facts about Formulaic Value Investing" published this year in the CFA Institute's Financial Analysts Journal charged that quantitative methods of finding "value stocks" simply "identify companies with temporarily inflated accounting numbers."