Investing in value stocks is a bit like putting together a successful March Madness bracket.
Sure, you could pick all favorites to advance to the Final Four, but it rarely works out that way. In fact, only twice since the current format (64 teams initially; now 68 teams, with four play-in games) of the men’s basketball NCAA Tournament was formed in 1985 have all four 1 seeds advanced to the Final Four. One of them happened to be last year. But in the previous 11 tournaments, at least one team from outside the top 4 seeds (and sometimes multiple teams) advanced to the Final Four. (Note: This only applies to the men’s NCAA Tournament; the women’s tournament tends to feature far fewer upsets, for whatever reason.)
A 5, 6, 7 or 8 seed (even a few 11 seeds have made the Final Four over the years!) outperforming the favorites seems improbable in a vacuum. But almost every year, at least one of them does. No one saw 11-seeded NC State’s magical Final Four run coming in 2024. Nor 11-seeded Loyola (Chicago’s) run to the semifinals in 2018. Or 9-seeded Wichita State in 2013. In 2023, the Final Four was overflowing with surprises, as two 5 seeds (Miami and San Diego State) and a 9 seed (Florida Atlantic) made up three-quarters of the Final Four.
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All of them, in one way or another, were value plays – teams that were perhaps a bit better than their regular-season records suggested. And like March Madness underdogs, value stocks have a history of outperforming growth stocks for long periods of time.
Value vs. Growth, Through the Years
According to Hartford Funds, value outperformed growth from 1985-1991, for a few years in the mid-1990s before the dotcom boom, and from 2001-2008 in the wake of the dotcom bubble and 9/11. In fact, value stocks have outpaced growth in three of the last six decades – in the 1970s and 1980s, and in the 2000s.
Since the Great Recession of 2008-09, however, growth has been king. That’s likely to change eventually. But it hasn’t yet and probably won’t in the coming months or year, thanks to the artificial intelligence catalyst driving up earnings, valuations and, until recently, share prices. Consider Mag. 7 stocks like Google (GOOG), Nvidia (NVDA) and Apple (AAPL) equivalent to Duke, UConn and Michigan State in your bracket. They’re always among the leaders, but they aren’t the only leaders.
This month, energy has been the only leader, posting double-digit gains at a time when all 10 other S&P sectors are in the red. That’s obviously a result of the Iran War and the sky-high oil prices it has wrought, both of which could be temporary phenomena. Prior to that, a number of undervalued sectors – consumer staples, materials, utilities – were off to fast starts in 2026 and have been outperforming since the Nasdaq topped in late October, five months ago.
Value stocks, in fact, are up 3.4% year to date (vs. a 3.7% loss in the S&P 500), and are +6.7% over the last six months (the S&P has been flat). Again, I don’t think value is suddenly going to start outperforming growth for years to come, but half a year of clear outperformance shows that they are an increasingly viable alternative in times of turmoil and uncertainty.
Picking Value Stocks Is Easier than Filling Out a Bracket
All that being said, it’s difficult to pick the right value stocks. It’s all well and good to know that a 5 seed or lower makes the Final Four more than 90% of the time. But identifying which team will do it is a tall task. Fortunately, value stock investing is a bit more of an educated guess, if not an exact science.
I prefer to screen for stocks that are trading at value prices (typically with forward price-to-earnings ratios south of 15, and price-to-sales ratios below 2.0) but with growth qualities (projected sales and earnings growth, preferably at a double-digit pace). That can put the odds more in your favor than, say, predicting Texas will be the latest 11 seed to make the Final Four (could happen!). Since taking over our Cabot Value Investor advisory two years ago, sticking with that growth-plus-value formula has helped me – and my subscribers – outperform the traditional value stock indexes.
To learn what other characteristics I look for – and what value stocks I’m currently recommending – click here.
In the meantime, I hope your portfolio looks a lot better than your bracket!
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