Skip to main content

Sound Advice: February 16, 2022

Is It Time For Value Stocks? 

Although there are many different types of stocks, whether they are U.S. or international, most tend to fall into one of two main groups: growth and value.  Growth stocks are those of companies with profits increasing at above average rates and they typically sell at higher valuations.  Value stocks are those of companies growing more slowly, often not consistently, and their shares tend to have lower valuations.

Some examples of growth stocks: Amazon, Netflix, Google, and Apple.  Some examples of value stocks: Procter & Gamble, Johnson & Johnson, and Berkshire Hathaway.

Valuations demonstrate the confidence that investors have in companies.  The traditional yardstick is a multiple of a company’s net profits.  For the stock market as a whole, historical valuations have typically been in the range of 15 to 18 times, though there have been periods such as the mid-1970s when valuations fell to the high single digits.  The flip side was the dot.com era when for a short time valuations doubled the norm.

For a slow-growing company these days, the multiple may be between 10 and 15 times profits.  A fast-growing company may get a multiple that’s twice as high.

When the economy is gaining momentum, inflation is tame, and interest rates are falling, investors tend to favor growth companies.  At the moment, inflation is way above normal, interest rates are en route to higher levels, and the economy is doing well, but there are continuing labor shortages and supply problems.  So the pendulum of investor interest may soon start to swing in the opposite direction.

After an extended period following the banking crisis of 2008-9, growth stocks have shined while value stocks have festered.  As a result, the disparity between the returns of growth stocks and value stocks has increased to the widest point in nearly three decades. 

 

Although this pattern may continue a bit longer, January’s market turbulence could well be a prelude to investors shifting to value stocks. 

N. Russell Wayne, CFP

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com 

Any questions?  Please contact me at nrwayne@soundasset.com

 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more

Sound Advice: May 31, 2023

High Yields, Yes!  But There Are Risks Now that failure to get much done in Washington seems to be the bottom line for lots of talk, but little action, it’s hard not to wonder whether we’re missing something.  Yes, the Federal Reserve Board has aggressively raised interest rates in the hope of putting a damper on excessively high inflation, but one would think that there might be some good news as a result of these efforts. The hoped-for result is that inflation is indeed moderating.  Also of importance, though, is the sharp improvement in interest rates on fixed-income investments, usually a.k.a. bonds.  For much of the past decade or more, interest rates have languished at or near historical lows, which created considerable shortfalls for folks living on fixed incomes. Thanks to the Fed’s hikes, the returns on bonds and the like are beginning to be of interest.  But . . . and that’s a big but . . . there are risks involved. For short-term investing at ...
Post a Comment
Read more