Value stocks, as measured by the Vanguard Morningstar Value ETF (VTV), have quietly beaten the S&P 500 over the last year, rising 16.8% vs. gains of 15.4% for the large-cap index.
And that outperformance is even more pronounced when you compare VTV to the S&P 500 Equal-Weight Index (up 10.1% in the last 52 weeks), which normalizes the impact of the mega-cap tech stocks that have driven so much of the market’s return over the last three-plus years.
So while the headlines (and most portfolios) have been dominated by big tech and AI, tuning out that noise and focusing on undervalued stocks of solid companies would have netted you better returns.
The good news for investors is that the latest malaise in the market is actually making that even easier.
Under the surface, most of the stock market is currently in a correction. Per calculations from MarketWatch, 80% of the S&P 500 constituents are more than 10% below their 52-week highs, which is the threshold for “correction” territory.
And, as noted by Cabot Turnaround Letter Chief Analyst Clif Droke in a recent update to his subscribers, as of September 30, “more than 40% of S&P 500 stocks were at least 20% below their 52-week highs,” which pushes them past correction territory and firmly into a bear market.
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For most investors, a bear market in nearly half of large-cap stocks may seem like bad news, but for value-focused investors it just creates a larger roster of potentially undervalued stocks with room to outperform when the market rally resumes in earnest.
That’s not to say, of course, that every newly beaten-down stock is a market-beating opportunity. But that kind of broad weakness meaningfully increases the odds that appealing stocks are now trading at a discount.
And as a bit of context, it’s important to remember that the bull market is far from over – earnings growth is simply too strong for it to up and evaporate, even considering the myriad macro headwinds right now (namely sky-high bond yields, oil prices and mortgage rates). And I think another across-the-board rally is coming, whether it happens next week (the start of Q3 earnings season in October might be a good bet), or in November, after the midterms.
In the meantime, I will continue to look for stocks of companies that boast strong growth and offer disproportionate upside – my “growth at value prices” mantra.
In the last three months alone, and despite the recent sideways action in many stocks, three of our stocks have hit their upside price targets and been “retired” from the portfolio.
And just a few days ago, I added a new high-potential stock that’s fallen out of favor but boasts better than 60% upside from here.
Yes, the market has been frustrating, but soon the dam will break, the rally will resume and value stocks will do quite well, as they have for most of 2026.
To learn more about my latest recommendation, subscribe to Cabot Value Investor today.
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