At first glance, this year looks like it has been a pretty good one for the market. As of Tuesday, the S&P 500 was up by a little more than 23% in 2021, and it was once again within striking distance of a record high.
A closer look, however, puts a curious twist on the story. While the broad market may be well up year to date, a select group of growth stocks has done the vast majority of the heavy lifting. Value stocks have underperformed, weighed down by steady businesses such as Discovery (DISCA +0.00%), International Paper (IP 0.40%), and Universal Health Services (UHS 0.01%). All three of these stocks are in the red for the year thus far, and they're hardly alone.
Image source: Getty Images.
That value-stock weakness has some bargain-hungry investors licking their chops. Others remain disinterested, whether because they prefer growth or because they make a point of steering clear of stocks that are currently falling -- or both.
Each investing mindset has its merits. But regardless of which side of the fence you sit on, there's something every investor ought to consider before 2021 turns into 2022.
A clear but curious underperformance
A picture, they say, is worth a thousand words. Well, so is a good chart -- like this one, which shows that the S&P 500 Growth Index is up nearly 28% this year, while the S&P 500 Value Index is up by a more modest 18%. Both value stocks and growth stocks were in rebound mode coming out of the early 2020 plunge that took shape as the COVID-19 threat reached pandemic status. In May 2021, though, value stocks simply dropped out of the bullish trend.
^SPX data by YCharts
It's not like a few oddly weak players exaggerated value's recent weakness either.
International Paper, United Health Services, and Discovery are sitting with year-to-date losses of 4%, 7%, and 25%, respectively. Verizon (VZ 0.86%) and FedEx (FDX +0.64%) have taken 14% and 8% hits of their own, and they are in good company. Television, healthcare, food, and packaging stocks are particularly well-represented among 2021's worst laggard large caps, even though most of them were able to grow their top and bottom lines this year despite the economic turbulence.
| Company | Industry | Trailing P/E | Forward P/E | Share Price Change (YTD) |
|---|---|---|---|---|
| Dow Chemical (DOW +2.40%) | Chemicals | 7.0 | 8.4 | (2.9%) |
| International Paper | Packaging & containers | 10.0 | 9.7 | (4%) |
| Cummins (CMI 0.25%) | Specialty industrial machinery | 14.2 | 11.9 | (4.6%) |
| Packaging Corp. of America (PKG +0.47%) | Packaging & containers | 16.7 | 14.0 | (5.3%) |
| Comcast (CMCSA 0.86%) | Entertainment | 15.7 | 13.1 | (7%) |
| Universal Health Services | Medical care facilities | 10.3 | 10.4 | (7%) |
| FedEx | Integrated freight & logistics | 13.4 | 10.8 | (7.5%) |
| Cardinal Health (CAH 0.69%) | Medical distribution | 12.7 | 7.9 | (8.6%) |
| Conagra Brands (CAG +1.03%) | Packaged foods | 13.1 | 12.3 | (10.4%) |
| DaVita (DVA +1.33%) | Medical care facilities | 12.0 | 12.6 | (10.5%) |
| Campbell Soup Company (CPB +0.89%) | Packaged foods | 13.7 | 14.6 | (10.9%) |
| Verizon | Telecom | 9.5 | 9.4 | (13.8%) |
| Leidos Holdings (LDOS +0.91%) | Information technology | 16.3 | 12.6 | (16%) |
| ViacomCBS (VIAC +0.00%) | Entertainment | 6.3 | 7.7 | (20.6%) |
| Discovery | Entertainment | 12.0 | 7.0 | (25.2%) |
Data source: FINVIZ (as of Dec. 14, 2021). YTD = Year-to-date. P/E = Price/Earnings Ratio.
Also worth noting is that the recent tepid performance of value stocks is actually an extension of an underperformance trend that started taking shape in mid-2017.
^SPX data by YCharts
But, nothing lasts forever.
Impending change
Of all the allocation-minded theories investors can apply to their portfolios, the value-growth dichotomy is rarely given its due.
That may just be a style thing. That is to say, aggressive investors seek out growth stocks regardless of the environment, while safety-conscious investors likewise gravitate toward value stocks without much heed to macro conditions. Both sets of investors might make a point of diversifying across sectors or market caps, but growth or value isn't a usual part of the stock-picking regimen.
Big mistake. Style can clearly make a big performance difference.
The coming year may well be the point where the multiyear pattern of growth stocks leading the market's rise ends, and leadership is ceded to value names. That's what Russell Investments expects, anyway. In their 2022 outlook, the fund management company's analysts assert that "above-trend growth and higher long-term interest rates favor cyclical and value stocks over technology and growth stocks."
And Russell isn't alone in this take. Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett also believes that inflation and interest rate hikes will benefit value names. Ditto for fund company GMO's asset allocation chief John Thorndike, who in the firm's third-quarter newsletter pointed to the "relative value opportunity for owning value stocks," adding that they "have the advantage versus the overall market and growth stocks." And that's just a small sampling of the professionals who expect things to be very different for value names now that inflation is up and economic growth is leveling off. Underscoring this idea is the fact that last month's annualized inflation for factories and production plants reached a modern-era high of 9.6%.
Take the hint.
At least it's a direction
Will the five aforementioned value stocks -- or any of the other 10 listed in the table -- be the leaders of value's relative resurgence? Nobody knows for sure. Other value stocks may fare better. These five names might continue to struggle.
From a risk-versus-reward standpoint though, the fact that the underlying businesses of the most beaten-down value stocks are still doing well makes them highly compelling prospects headed into 2022. At the very least, they make a great place to start your due diligence.
