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Large-Cap Value Stocks Are Exactly That ... A Value
It seems that volatility and headline risk continue to control the markets. Sovereign debt issues in Europe, poor employment gains in the United States, slowing emerging market economic growth and civil unrest in the frontier markets are all contributing to the uneasiness of investors. To that end, the market has once again resumed its up and down pattern as investors react to the day's headlines. However, investors shouldn't abandon stocks altogether. Those portfolios with a long-term focus can find safety and solace among the volatility. For those investors, one "style" group may be the best way to play the remainder of 2012 and beyond.
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Value Trumps Growth
As in during the dotcom bubble in the 1990s occurred, the attention spans and portfolios of many investors shifted towards high-flying growth stocks like JDS Uniphase (Nasdaq:JDSU). That mentality persisted throughout the next decade. However, investors may want to move a few style-boxes over to the left and focus on large-cap value. As the "Bedrock of America" these firms are leaders in their respective industries and represent common household names. These large multinationals provide exposure to faster growing nations outside of the U.S., but also provides stable revenue streams and stronger balance sheets. Blue chips are better equipped to handle any possible downturns in the market, and their bulk offers advantages in a slowing and uncertain economy. These include their larger dividends, ability to acquire floundering smaller competitors and lower volatility. And they are currently cheap too. According to research conducted by investment bank Credit Suisse (NYSE:CS), value stocks in the S&P 500 index have lagged growth stocks by roughly 9% this year, and are currently offering a better "value" for investors. For example, the iShares S&P 500 Growth Index (ARCA:IVW) can be had for a current P/E of 14. Meanwhile, its value-tilted twin, the iShares S&P 500 Value Index (ARCA:IVE) can be had for just a P/E of 12.
That discount seems more enticing when you look at the long-term return picture. Research by economists Fama and French showed that over the past 81 years, large-cap value stocks have returned an average of about 11% annualized. That compares to just 9% for large-cap growth firms.
SEE: Value Investing
Shifting Focus
Given the market's recent uncertainty, now could be a great time to pick up some large-cap values for a long-term portfolio. The previously mentioned, iShares S&P 500 Value ETF makes an ideal choice. However, with expenses running next to nothing at 0.10%, the Vanguard Value ETF (ARCA:VTV) might make a better long-term choice. Tracking a portfolio for about 431 value stalwarts including energy giant ExxonMobil (NYSE:XOM) and healthcare superstar Pfizer (NYSE:PFE), the ETF provides an easy inroad to value investing. Likewise, the Schwab U.S. Large-Cap Value ETF (ARCA:SCHV) offers a rock-bottom way to play the style-box.
Perhaps some of the biggest values can be had in former technology high-flyers. The sector has become the perfect value investor's hunting ground, with superstar value managers like Bill Nygren adding increased exposure to the sector. For example, the tech bellwether trio of Microsoft (Nasdaq:MSFT), Cisco (Nasdaq:CSCO) and Intel (Nasdaq:INTC) can all be had for forward P/E's of around 10 and offer rich dividend yields in the 1.9 to 3.1% range.
Speaking of those dividends, large-cap value stocks offer stronger and higher yields than many of their growth sisters. With interest rates still hovering around decade lows, investors looking for income should consider the sector with gusto. The value-titled PowerShares S&P 500 Low Volatility (ARCA:SPLV) features a strong 3.14% yield.
The Bottom Line
With uncertainty continuing to plague the markets, many investors have retired to the sidelines. However, the best strategy could be adding a dose of large-cap value to a portfolio. These monster blue chips offer advantages to portfolios in an uncertain economic environment and are currently trading for peanuts. The proceeding ideas, along with the WisdomTree Total Dividend (ARCA:DTD), are great examples on how to beef up a portfolio's exposure.
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
Value Trumps Growth
As in during the dotcom bubble in the 1990s occurred, the attention spans and portfolios of many investors shifted towards high-flying growth stocks like JDS Uniphase (Nasdaq:JDSU). That mentality persisted throughout the next decade. However, investors may want to move a few style-boxes over to the left and focus on large-cap value. As the "Bedrock of America" these firms are leaders in their respective industries and represent common household names. These large multinationals provide exposure to faster growing nations outside of the U.S., but also provides stable revenue streams and stronger balance sheets. Blue chips are better equipped to handle any possible downturns in the market, and their bulk offers advantages in a slowing and uncertain economy. These include their larger dividends, ability to acquire floundering smaller competitors and lower volatility. And they are currently cheap too. According to research conducted by investment bank Credit Suisse (NYSE:CS), value stocks in the S&P 500 index have lagged growth stocks by roughly 9% this year, and are currently offering a better "value" for investors. For example, the iShares S&P 500 Growth Index (ARCA:IVW) can be had for a current P/E of 14. Meanwhile, its value-tilted twin, the iShares S&P 500 Value Index (ARCA:IVE) can be had for just a P/E of 12.
That discount seems more enticing when you look at the long-term return picture. Research by economists Fama and French showed that over the past 81 years, large-cap value stocks have returned an average of about 11% annualized. That compares to just 9% for large-cap growth firms.
SEE: Value Investing
Given the market's recent uncertainty, now could be a great time to pick up some large-cap values for a long-term portfolio. The previously mentioned, iShares S&P 500 Value ETF makes an ideal choice. However, with expenses running next to nothing at 0.10%, the Vanguard Value ETF (ARCA:VTV) might make a better long-term choice. Tracking a portfolio for about 431 value stalwarts including energy giant ExxonMobil (NYSE:XOM) and healthcare superstar Pfizer (NYSE:PFE), the ETF provides an easy inroad to value investing. Likewise, the Schwab U.S. Large-Cap Value ETF (ARCA:SCHV) offers a rock-bottom way to play the style-box.
Perhaps some of the biggest values can be had in former technology high-flyers. The sector has become the perfect value investor's hunting ground, with superstar value managers like Bill Nygren adding increased exposure to the sector. For example, the tech bellwether trio of Microsoft (Nasdaq:MSFT), Cisco (Nasdaq:CSCO) and Intel (Nasdaq:INTC) can all be had for forward P/E's of around 10 and offer rich dividend yields in the 1.9 to 3.1% range.
Speaking of those dividends, large-cap value stocks offer stronger and higher yields than many of their growth sisters. With interest rates still hovering around decade lows, investors looking for income should consider the sector with gusto. The value-titled PowerShares S&P 500 Low Volatility (ARCA:SPLV) features a strong 3.14% yield.
The Bottom Line
With uncertainty continuing to plague the markets, many investors have retired to the sidelines. However, the best strategy could be adding a dose of large-cap value to a portfolio. These monster blue chips offer advantages to portfolios in an uncertain economic environment and are currently trading for peanuts. The proceeding ideas, along with the WisdomTree Total Dividend (ARCA:DTD), are great examples on how to beef up a portfolio's exposure.
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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