This Value Play Still Has Plenty Upside
In my experience, I’ve found it best to be flexible in my investment approach.
Flexibility allows you to navigate any type of market environment.
I’m not a permabull nor am I a permabear.
I’m bullish when it pays to be bullish and bearish when it’s worth being bearish.
That same flexibility goes for the types of stocks I select as well.
Most people identify as either a value hunter or a growth investor.
Warren Buffett is a dedicated value guy. Philip Fisher was a prominent growth investor.
As the terms imply, growth stocks stand out for their sales and earnings growth metrics. But they also typically carry lofty valuations.
Value stocks trade at deep discounts relative to the value of a company and its assets. These stocks are typically cheaper relative to the overall stock market or their peer group. But they don’t usually possess high growth rates.
As I said, I’ve found flexibility is key to maximizing profits. Peter Lynch, another legendary investor, was known as a chameleon because he would adapt to whatever was working … and he averaged 29% annual returns.
Following the tech bubble in the late 1990s, value stocks led the way. But, for the better part of the last decade, it’s paid to be a growth investor.
So, the question is this: how do you know when the market makes its next shift from growth to value?
Today I’ll show you one indicator that says we are now approaching another such inflection point.
Here’s Why Value Is Set to Surge Higher
To time value plays I look at high yield bond spreads. More specifically, high and falling junk bond yields are a great indicator of huge value profits.
That’s because a spike in junk bond yields indicates panic selling and resulting deep value buying opportunities.
As the chart below shows, this happened several times over the past decade. And after the last two times, the S&P 500 Value Index returned 30% and 31% over the year following the spike:
But the old adage of “don’t catch a falling knife” applies here. That means don’t fall for value traps … where a stock appears cheap but is facing significant challenges.
Ted wrote yesterday in Bauman Daily about how to identify companies that will survive the economic fallout from the pandemic.
And there is a way to capture the value play without concentrating in high-risk sectors like energy and financials.
I recommend the iShares Edge MSCI USA Value Factor ETF (NYSE: VLUE). This exchange-traded fund (ETF) will give you value exposure across various sectors, even in high performing sectors like technology and health care.
There’s still time to profit from the panic selling and cash in on value!
Research Analyst, The Bauman Letter