Admittedly, value stocks aren't very entertaining. They're also not the sorts of investments you brag about owning at cocktail parties. In fact, it's not a stretch to describe them as being a bit boring.
But that doesn't mean you don't want to own a healthy dose of value stocks, even if your only goal right now is maximizing your return on money you won't be needing anytime soon. Here are the top three reasons investors of every type may want to consider adding more value stocks to their portfolio.
Value typically outperforms growth in the long run
By definition, growth stocks are intended to generate capital appreciation. However, there's data that questions just how successfully growth stocks do the job.
The key to the idea lies in the proverbial fine print.
Perhaps the most notable number-crunching comparing growth investing to value investing was first done by Nobel Prize laureate Eugene Fama and Dartmouth professor Kenneth French. Now often referred to as the Fama and French Five-Factor Model, the research they began indicates that since 1927, when reinvesting the dividends, value stocks boast an average annual gain that's 4.1% better than growth stocks' average annual gain.
Putting the data in different terms, Dr. Robert Johnson, Creighton University professor and co-author of the book Strategic Value Investing, explains that since 1927, there's been a 93% chance value has outperformed growth in any 15-year stretch.
Problem: The exception to this finding stopped being the exception beginning in 2007, and instead became the norm. Since then, growth stocks have regularly outperformed value stocks. If most or all of your experience with the stock market is after that point, you've got good reason to choose growth over value names.
Just know that the economic backdrop since 2007 has been very unusual, marked by exceptionally low interest rates that undermine typical valuations of value stocks. Said another way, value stocks' average price/earnings and price/book ratios have been uncharacteristically low for the past 15 years. Both work against value stock prices.
Effective Federal Funds Rate data by YCharts
Also know that the underlying dynamic is changing now. After 15 years of ultra-low interest rates that the market essentially demanded, we're now arguably paying a major, generational price for the decision. Interest rates are soaring, reaching levels seen right at the beginning of the subprime mortgage meltdown, perhaps en route to even higher levels. This may well set the stage for a restoration of value's outperformance of growth. At the very least, it means value names are going to start performing better.
Value stocks (once again) offer defense against downside
Given their underlying nature, it's no surprise that value stocks tend not to tumble as much as growth names do when the broad market's in a pullback. Growth-minded investors don't entirely care, however, as they can confidently expect their holdings to lead the way when the market recovers. And, for the better part of the past several years, they've been right about these growth-led rebounds.
But the underlying environment is changing in a rather dramatic way. For the first time in a long time, value stocks are outright resisting weakness that's upending growth stocks, as we've seen since the end of last year.
Data by YCharts
In addition to (much) higher interest rates buoying value stocks' valuations while crimping growth stocks' valuations, we're seeing hints of changing investor psyches. Namely, younger people with lots of time to ride out the volatility growth stocks dish out are increasingly opting for safer value stocks anyway.
Although they still own plenty of progressive names, such as electric vehicle maker Rivian and solar power tech outfit Enphase Energy, Apex Fintech Solutions reports Gen Z investors remain big fans of predictable players like Costco and Chevron. Don't be surprised to see this interest in value names continue to grow as all investors age, helping drive their outperformance going forward.
The irony? Many of these younger investors are seeking out more sensible names for their portfolios after getting burned by aggressive growth stocks that didn't perform as hoped.
Now you can actually live your life
Finally, you may have enjoyed steering your portfolio through a tricky past two and a half years. With COVID-19 lockdowns and prevention efforts now waning and the world easing back to its pre-pandemic activities, however, you'll likely want to join others in getting out from behind your computer. If you own too many tickers that require you to keep constant tabs on them, though, that's tough to do.
Fortunately, most value stocks aren't part of the ongoing news cycle, and don't need constant monitoring.
Take drugmaker Pfizer as an example. While all stocks bring some element of risk to the table, surprising news isn't one of the risks Pfizer (or its pharmaceuticals peers) are known for. One quarter's results typically look a lot like the prior quarter's numbers, and by the time new drugs are launched, plenty of pundits have already sounded off about their revenue potential.
The point is, you can own a piece of Pfizer without feeling compelled to check in on it every single day. The same can't be said for riskier growth picks like Tesla or Amazon, which are perpetually one headline, one tweet, one lawsuit, or one investigation away from major change.
