Back to top

Value Stocks Outperforming Growth: 5 Top Picks

Read MoreHide Full Article

The long overlooked corner of the broad stock market — value investing — has started to gain momentum lately amid escalating trade tensions and an aging bull market. This is especially true, as the Russell 1000 Value Index has gained 2.45% since Jul 20, outperforming the 0.83% increase in the Russell 1000 Growth Index.

Per Bank of America Merrill Lynch, the Russell 1000 Value Index beat the Russell 1000 Growth Index last month for the first time since March and by the widest margin since September 2017. The value index climbed 3.8% versus 2.9% for the growth index.

The outperformance came mainly from disappointing earnings from some of the high-profile tech companies, including Facebook FB, Netflix NFLX and Twitter TWTR, that took a toll on the growth stocks. Additionally, rising U.S. debt and deficits combined with escalating trade tensions are weighing on economic growth, raising the appeal for value stocks amid improving fundamentals.

Insights Into Value Investing

Value stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued by the market. These seek to capitalize on inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with growth and blend counterparts. Additionally, value stocks are less susceptible to trending markets and their dividend payments serve as safety at times of market turbulence.

Notably, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon.

Will Momentum Continue?

The solid momentum is likely to continue given that trade worries have flared up once again with China threatening to impose tariff on $60 billion worth of American goods if the United States places more tariffs on Chinese imports. This has discouraged risk-on trade in an already fragile environment. The move came following the news that Trump is mulling over raising tariffs from a proposed 10% to 25% on $200 billion of Chinese goods. Both countries already implemented tariffs on $34 billion worth of each other’s goods in July. Each side is also expected to implement tariffs on an additional $16 billion in goods.

Additionally, the American economy has been growing at the fastest pace in nearly four years buoyed by an impressive labor market, higher wages, increasing consumer spending and high consumer confidence. In particular, the historic tax overhaul will continue to provide a huge boost to value stocks. This is because it will create an economic surge, boosting job growth in manufacturing and other sectors, increasing inflation and interest rates. It would further lead to higher earnings, increased buyback activities, and fatty dividends, prompting investors to rotate out of growth and into value stocks.

Moreover, after years of underperformance, value stocks look appealing with the forward price-to-earnings ratio for the Russell 1000 Value Index at about 15.3 times compared with 22.1 times for the Russell 1000 Growth Index.

How to Play?

Given recovering sentiments over value investing, investors may want to consider a nice play. While there are number of options available in the value space, focus on stocks with strong fundamentals could be a less risky way to tap the same broad trends. Below we have selected five stocks having a Zacks Rank #1 (Strong Buy), a Value Score of A, triple-digit earnings growth for this year and a Zacks Industry Rank within the top 30%, with the help of the Zacks Stock Screener. You can seethe complete list of today’s Zacks #1 Rank stocks here.

ArcBest Corporation (ARCB - Free Report)

This company provides freight transportation services and solutions. The stock has an expected earnings growth rate of 133.08% for this year and belongs to a top-ranked Zacks industry (top 1%). It has a market cap of $1.19 billion.

Fibria Celulose S.A. (FBR - Free Report)

This is a Brazil-based paper product company, which produces bleached eucalyptus pulp exclusively from renewable plantation. It has an expected earnings growth rate of 185.25% for this year. Fibria Celulose has a market cap of $10.95 billion and falls under a top-ranked Zacks industry (top 8%).

Turtle Beach Corporation (HEAR - Free Report)

This company provides various gaming headset solutions to various platforms, including video game and entertainment consoles, handheld consoles, personal computers, and mobile and tablet devices under the Turtle Beach brand. With a market cap of $441.4 million, the company has an estimated earnings growth rate of 625% for this year. It belongs to a top-ranked Zacks industry (top 22%).

Molina Healthcare Inc (MOH - Free Report)

This company provides Medicaid-related solutions to meet the health care needs of low-income families and individuals; and to assist state agencies in their administration of the Medicaid program in the United States. With a market cap of $7.8 billion, it has an expected earnings growth rate of 1,239.29% for this year. The stock falls under a top-ranked Zacks industry (top 25%).

PetroChina Company Limited (PTR - Free Report)

This company is engaged in a broad range of petroleum-related activities, including the exploration, development and production of crude oil and natural gas; refining, transportation, storage and marketing; production and sale of chemical products; and the transmission, marketing and sale of natural gas. The stock has an expected earnings growth rate of 317.42% for this year and belongs to a top-ranked Zacks industry (top 27%). It has a market cap of $133.4 billion.

Bottom Line

Value stocks seek to outperform amid market uncertainty. As such, investors should take a closer look at a few of the attractive value products in this segment for excellent exposure and some outperformance in the near term.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>



More from Zacks Analyst Blog

You May Like

Published in