All eyes are on electric carmaker Tesla Inc. (Nasdaq: TSLA) this week, as shares surged to record highs.
The company surpassed Volkswagen to become the most valuable carmaker.
If Tesla were a division of Volkswagen, it would account for just 3.3% of its entire production.
The mania around Tesla reminds me of bitcoin’s meteoric rise. Its followers crowd message boards, cheering on the stock as it flirts with a 400% gain since May 2019.
But people aren’t buying Tesla because of stellar earnings. It barely eked out a profit last quarter. And it’s trading at more than 17 times revenue.
People are buying on emotion — on hopes and dreams. When that spreads through the market, investors are wise to shut out the noise and focus on fundamentals.
Now, I want to set the record straight: I’m not ragging on Tesla or its cars. But its share price is detached from reality.
While dumb money chases the share price higher, I’ll show you a group of stocks that offers more upside and less risk.
The Forbidden V-Word
There is a ban on a certain word in the investment world today. Investment writers, analysts and money managers are smacked on the wrist for using it.
The word is “value.” And it is used to describe a class of stocks that has lagged most others for the better part of this 10-year bull market.
Value stocks are those that trade at a lower price than what their fundamentals would suggest is a fair price. Investors usually think of this in terms of a low price-to-book or price-to-earnings ratio.
Take a look at the chart below. It shows the relative return between a growth fund (orange) and a value fund (purple).
(Source: Refinitive Eikon)
Growth returned about twice that of the value fund. And most of that outperformance came in the past year.
But the mania around “growth” stocks reminds me why we invest in the first place.
To own a piece of a business.
It’s not to own a piece of hope or a dream. Those are free and infinitely divisible.
And that point seems to have been lost recently.
To quote Warren Buffett, the godfather of value investing: “Nothing sedates rationality like large doses of effortless money.”
And that’s how overpriced stocks keep climbing beyond rational prices. People make money when growth stocks rip higher. And they think that is a good reason to put more money in.
But there is great news. We don’t have to chase shares of these companies higher.
Instead, we can turn toward beaten-down value stocks and buy them at a bargain.
And if you’re a little less interested after hearing that, then this is more reason to keep reading.
Value Will Trounce Growth
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Growth’s outperformance is a recent phenomenon, but not an entirely new one. Growth also did better than value stocks during the dot-com bubble in the late ’90s.
But Fidelity carried out a long-term study on this from 1990 to 2015. And, with almost three decades’ worth of market data, it found that value stocks outperformed growth stocks overall.
That means the recent trend favoring growth stocks is running its course. And soon, it will be time for value stocks to start their rally.
Consider a value-based exchange-traded fund (ETF) such as the SPDR S&P 500 Value ETF (NYSE: SPYV) to capture this move upward. This value fund grew by 19% in the last year and delivered a 2.25% dividend yield. And it carries a basket of great names such as Verizon, Johnson & Johnson and even Warren Buffett’s Berkshire Hathaway.
Good investing,
Managing Editorial Analyst, Winning Investor Daily
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