As stock prices continue their epic climb, value investing has lost some of its luster. A June report from Goldman Sachs even questioned whether value investing is dead, citing a 15 percent cumulative loss over the last decade — the longest losing streak for value investors since the Great Depression.
Don’t mothball this strategy yet, however.
“Value investing isn’t dead, but the universe of securities value investors can invest in profitably has shrunk,” says Tomer Cohen, founder of Five Roads Capital in Cambridge, Massachusetts.
The growth of passive investing has helped fuel the overvaluation of many large-cap companies, Cohen says. Still, value investors looking to generate higher portfolio returns can fine-tune their strategy in myriad ways.
Leverage rising rates. Bond investors may bemoan rising rates, but value investors have reason to embrace them.
Rising rates should result in slightly lower stock prices, says Sameer Samana, global quantitative and technical strategist for Wells Fargo Investment Institute in St. Louis. If so, the investing universe will expand for value investors.
[See: The 10 Best ETFs for Value Investors.]
The economy is the big question mark that may determine which way stock prices move. The current growth cycle has been sluggish. The Federal Reserve’s decision to raise the federal funds rate was designed to keep growth increasing at a sustainable pace, while staving off inflation.
Simon Hamilton, portfolio manager with The Wise Investor Group at Robert W. Baird in Reston, Virginia, says that when growth is scarce, investors flock to a handful of stocks that deliver higher earnings.
Value stocks, on the other hand, often fare well in periods of broad economic growth. Just after last year’s election, value stocks rallied as investors anticipated an uptick in growth.
“In a rising-rate environment, we would expect value to do better, as it did last year,” Hamilton says.
Investors, he adds, should remember that value and growth stocks move in cycles. If rising rates stimulate further economic growth, value stocks could take off.
“Value investors should be on the lookout for any sign of a correction as an opportunity to deploy capital,” says Michael Banks, founder of The Fortunate Investor, an investing and personal finance blog.
What goes up, must come down, Banks says. So if the market begins falling, value investors who go into buying mode may benefit.
Adjust your scope. When value stocks appear lackluster, investors may need to look beyond domestic stocks for good buys.
“Emerging markets are an opportunity for value investors since they’re distinctively cheap and have better economic and earnings trends than here in the U.S.,” Hamilton says.
Hamilton also thinks a case can be made for investing in European or Japanese markets. Over the last decade, the performance gap between the U.S. and certain foreign markets has narrowed, making them more attractive to investors.
[See: 10 Great Ways to Buy Emerging Markets.]
Value investors who look to emerging and foreign market alternatives should understand the risk that entails, however. Hamilton says that while share prices are currently better abroad, investors can lose big on overseas stocks if the market suffers a significant downturn.
The passive-investing frenzy may also be an unexpected source of investment opportunities because a multitude of undervalued companies eventually could be left behind in the rush toward passive funds. As the masses chase a few high-flying stocks, eagle-eyed value investors should be able to scoop up shares of strong, overlooked companies.
Play the long game. Rising stock prices can easily frustrate value investors, but that’s why they should think long term.
In our current environment, “stock prices are divorced from the fundamentals of revenue and profits,” says Nahum Daniels, a certified financial planner with Nahum Daniels in Stamford, Connecticut.
Under those conditions, investors often feel stymied trying to gauge value so they end up walking away. Although being price-conscious matters, keep valuations in perspective.
“Valuations are a poor timing tool, but they do provide a reasonable framework for future returns,” says Hamilton, who also suggests investors stay the course by setting realistic expectations and remaining disciplined during potentially difficult markets.
Also, value investors should remember that time is on their side — provided they’ve planned ahead.
“If you’re forced to sell when the market is down because you need cash, that’s when value investing doesn’t work,” says Kim Forrest, vice president and senior equity analyst at Fort Pitt Capital Group in Pittsburgh. “Keep long-term money in the market and make sure you have cash on hand so you’re not forced to sell at a bad time.”
Thinking full cycle is another way to stay grounded.
“Markets go up and then they go down. Passive investors are going to get caught in a very punishing market when it enters a bear market cycle, or when prices start to go down,” Daniels says.
In that scenario, patience is a value investor’s most powerful weapon. Good things generally come to investors who wait, including a market that eventually swings back in their favor.
[See: 10 Tips for Keeping a Cool Head in a Market Meltdown.]
“In the full cycle, you want to be a value investor,” Daniels says. “Even if you miss some of the fireworks on the upside, you’re going to miss lots of pain on the downside.”
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Value Investing Isn’t Dead, But You Need to Adapt originally appeared on usnews.com
