Value Investing Roars Back in 2021:

Depressed share values due to COVID are starting to see a rise

April 21, 2021

Proponents of growth investing have had a hay day over the past few years and eschewed value investing because its performance, while good, did not match the returns of growth stocks. However, the real defining quality of a lasting investment model is its ability to outperform in the long term. Comparisons of the two philosophies consistently show value investing outperforming growth and the markets over the long-term horizon.

What is value investing?

Value investing is a stock-picking model that favours choosing equities that are undervalued in share price due to current market forces, yet their estimated intrinsic value is much higher in reality. Essentially, no matter which value portfolio modelling system you choose – Graham, Buffet or Lakonishok – they all look for ‘stocks on sale.’

These equities are purchased and held until they realize their true value. This could take months or years to develop, and as long as the business’ fundamental values remain strong, you would hold onto these stocks, only reaping the rewards if their share price becomes over-priced next to their intrinsic value.

Most value managers evaluate at least five major metrics, including:

  • Price-to-Earnings Ratio
  • Debt-to-Equity Ratio
  • PEG Ratio
  • Price-to-Book Ratio
  • Free Cash Flow

Value investment theory was developed in the 1930s and has outperformed growth investing and the markets over the entire period, only falling out of favour during brief stints.

Value Investing Since the GFC

The Great Financial Crisis in 2008 saw many governments around the world, but especially the US, favour propping up equities in their free markets, even over their own economies and value investment strategies suffered as a result. Many wealth professionals over the years since had started to question the value of value investing.

However, those that stuck to value’s principles are reaping large rewards now. The Russell 1000 Value Index, which measures the performance of large-cap value companies, saw an increase of close to 9% so far in 2021, while the Russell 1000 Growth Index increased only 0.13%. Is this a definitive switch back to value stocks over growth stocks?

In my opinion, with the expected economic stimulus by governments post-pandemic that focus more on the economy, as witnessed by both Biden’s first 100 days policies and Chrystia Freeland’s (Canada’s Finance Minister) most recent budget, value investing is still the long-term winning investment philosophy.

Wealth Sense in 2021

Be sure to tune in monthly in 2021 for my continued thoughts on the markets, how they may change and what to expect.

Looking to make a change, want a second opinion, or looking for additional advice? Feel free to reach out to me any time by phone or email.

Author Steve McBride, Investment Advisor, Echelon Wealth Partners, looks forward to connecting with you about your future wealth management needs.

 

 

Disclaimers

 

This blog is solely the work of Steve McBride for the private information of his clients. Although this author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and this author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of this author alone, and they have not been approved by, and are not necessarily those of, Echelon.

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by authors. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

The opinions expressed in this report are the opinions of this author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute this author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Echelon Wealth Partners Inc., its divisions, subsidiaries, and affiliates, do not provide any income tax advice and does not supervise or review any income tax returns. Please consult your accountant.

Source(s): 

https://www.investopedia.com/articles/fundamental-analysis/09/five-must-have-metrics-value-investors.asp

https://finance.yahoo.com/news/why-value-investing-come-back-163551632.html

https://www.forbes.com/sites/investor/2021/04/01/value-stocks-showing-signs-of-awakening/?sh=6f29ee68614d

https://www.barrons.com/articles/what-value-investing-strategies-are-missing-51618427835

https://www.theglobeandmail.com/politics/article-federal-budget-2021-highlights-child-care-housing-jobs-recovery/

https://www.investopedia.com/joe-biden-s-economic-plan-save-the-middle-class-4769869