​As Sam Sees It: 10 Value Stocks for Investors to Consider When Everyone Else is Chasing Growth

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, Managing Director, U.S. Equity Strategist for S&P Global Market Intelligence, for his perspective on the current market.

EQ: The biggest story this week seems to be just how eerily quiet the market is right now, and perhaps that itself is reason for concern. Is this much ado about nothing or do you agree that the excessively calm market is noteworthy?

Stovall: An excessively calm market certainly is noteworthy. The last time we had a very calm market like we have today was in the second quarter of 2011, just before we had a near bear market take hold. At the same time, you might remember the old adage that, “You never short a dull market.” Well, we’re certainly experiencing a dull market today.

So my belief is that while the average VIX (measure of implied volatility) reading is around 20, whereas the current VIX reading is closer to 12, we’re probably going to see the VIX move higher in the near-to-intermediate term because it really doesn’t have that much further to fall. At the same time, I would not be looking upon this as a reason to be shorting the market or to be bailing out and heading into cash.

EQ: Despite the caution of a correction coming soon, the market is still undergoing a rotation into the cyclical sectors. What do you make of these seemingly contradicting factors?

Stovall: Well, maybe they’re not so contradictory and what it’s actually doing is giving you an idea that when we do go through some sort of hiccup and a decline of price, perhaps simply because we need to digest some of these gains sooner or later, the indication is to not give up on the stock market. Instead, you should be adopting a buy-the-dip mentality.

So we have very low volatility, and thus the worry that we should be seeing some increased volatility and maybe a sell-off in stocks as investors and traders look to take profits from the advance off the July 11 low. But I think the rotation into cyclical sectors implies that the economy is improving, so the Fed might be more willing to raise rates as the year comes to a close, and as a result, earnings could be improving, which would imply that we probably should be embracing a buy-on-the-dips mentality.

EQ: In this week's Sector Watch report, you noted that this bull market would go down among the top two most expensive bull markets in history if it ended at its most recent high. With that said, there are still opportunities for investors looking for value. How did you go about finding some of those opportunities?

Stovall: Well, right now the S&P 500 is trading at a P/E of more than 25 times trailing 12-month GAAP earnings. That would place it at the second most expensive market top since World War II, behind only the bull market that ended on March 24, 2000. But P/E ratios are really not a good market-timing technique. We saw that seven of the 12 bull markets peaked out below the average 19.2 and we actually had two bull markets that came to an end with their P/E at 10 or lower. So my feeling is that investors are still going to be focusing on valuations.

I looked at those sub-industries in the S&P 1500, which is our large, mid and small-cap composite. I looked at those that had P/E ratios below the market as a whole, but also at S&P analyst recommendations that were indicating a majority of stocks within the sub-industry groups that were ranked at buy or strong buy. I then also looked for some technical indicators that showed momentum was in favor for these groups. So basically, I was going with the investor psychology of you’re better off looking for some value, even in an expensive market. There were 10 sub-industries, and as a result, 10 proxy stocks that I selected with below market valuations but above market momentum.

EQ: Considering what the market conditions are right now, would you say this is a tough time to be a value investor?

Stovall: Based on what the market is doing now, it’s probably a better time to be a value investor than it is to be a growth investor. That’s mainly because it’s probably easier to stay the course. When looking at the S&P large-cap, mid-cap, and small-cap EPS growth expectations, combined with P/E ratios, you have higher growth and lower valuations for each of these three value components as compared with their growth components. So if you are a longer-term oriented investor and you’re looking to purchase some stocks that you will hold for a while and not trade over the next couple of weeks or months, then I would say you’re probably going to find better opportunities on the value side of the ledger than on the growth side.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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