The idea of investing with a keen focus on value sounds sensible — virtuous, even. Who doesn't want to be smart about the price paid for stocks relative to companies' true worth?
For months, investors have pressed the case that stock market leadership should be passing from excellent-but-expensive growth stocks to cheaper value stocks more tied to a strong U.S. economy — while also predicting the overall market indexes will continue to edge higher.
In practice, though, any lasting renaissance for true value stocks would likely involve a period of tougher overall market performance for a good while longer. Major shifts in style regimes usually happen in the crucible of a market setback, and growth stocks simply represent too much of the market to retreat quietly while value moves to the fore.
And the psychological barriers to investors collectively embracing genuinely cheap, neglected stocks should not be overlooked: Owning the cheapest stuff means buying companies that appear not just boring but broken — terminally "disrupted" by technological change.
Let's say an an investor took a look at this chart of the S&P 500 Growth ETF, the IVW, dusting the Invesco S&P 500 Pure Value (RPV) by 36 percentage points over the past five years and decided it was time to bet that the laggard and leader will swap places.
Mean-reversion does happen over long periods of time, for sure. And owning cheap stocks always means betting in disliked, struggling companies. But beyond a sense that "Value is due to make a run here," it's unclear the market and economy are in a spot where a revival is necessarily imminent.
The S&P 500 Pure Value Index is a decent proxy for the pool of larger stocks where one would fish for beneficiaries of a value resurgence. It collects the stocks in the S&P trading at the cheapest statistical levels based on price-to-book, price-to-earnings and price-to-sales ratios.