Historic volatility has shaken the stock market badly and pushed it to correction territory last week, with investors fearing the end of cheap money policy era due to higher inflation, faster growth and rising budget deficits. This has raised the appeal of value investing.
This is especially true as value stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued by the market. Value stocks often overreact to both positive and negative news, resulting in share price movement that does not reflect the company’s true long-term fundamentals. This creates buying opportunities in such stocks at depressed prices and shows the potential for capital appreciation when the stock finally reflects its true market price.
As a result, value stocks have the potential to deliver higher returns and exhibit lower volatility compared with growth and blend counterparts. In fact, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon. Also, value stocks are less susceptible to trending markets.
The long-term fundamentals for the stocks have been bullish given accelerating global economic growth, strong corporate earnings and the euphoria surrounding the new tax legislation. Additionally, growth in the U.S. economy has been solid, buoyed by an impressive labor market, higher wages, increasing consumer spending and high consumer confidence.
In particular, the biggest tax overhaul in decades is expected to provide a huge boost to the value stocks. This is because massive tax cuts will create an economic surge, boosting job growth in manufacturing and other sectors, increasing inflation and interest rates. Additionally, it would lead to higher earnings, increased buyback activities, and fatty dividends, prompting investors to rotate out of growth and into value stocks.
Given this, investors may want to consider a nice value play in the current erratic market. For them, we have presented five ETFs and stocks that will likely outperform in the coming weeks if volatility prevails.
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