Stocks can be divided into two broad categories, growth and value. Growth stocks are those of companies that are anticipated to grow earnings at a rate significantly above the market or industry averages. These are stocks that tend to increase in value rather than pay a high income.
A value stock trades at a price perceived to be below what fundamental characteristics such as reputation, earnings outlook, assets, dividends and cash flow justify. Common characteristics are high dividend yield and low valuation metrics, such as price/book and price/earnings ratios.
Each type tends to outperform the other in different market environments and types of recoveries. Growth stocks tend to outperform in periods of strong economic growth with low interest rates. Value stocks have generally done better in slower growth or more uncertain markets.
Through the decades each type of stock has had periods of both outperformance and underperformance of the other type. Certain market phases tend to favor one or the other. In addition, recoveries with different characteristics affect which type performs better. Up until 10 years or so ago the historical performance of growth and value had been roughly equal over the long term. But growth ran away over the last six years.
Growth vs. Value: The Last Six Years
As you can see from the chart courtesy of Yahoo Finance, growth stocks, as measured by the iShares S&P 500 Growth ETF (IVW), delivered more than double the return of iShares S&P 500 Value ETF (IVE) over the last six years. That’s about as lopsided as the relative performance has been over the last 100 years.
Performance has been off the charts for growth stocks for an unusually long period of time. There are a few good reasons for such an anomaly. It has been an environment of steadily rising stock prices with low interest rates and low inflation. Technology stocks, which are overwhelmingly considered growth stocks, have also tipped the scales. We are in a technological revolution and there is enormous growth in that sector.
But things are changing. Inflation is still an issue. And the Fed is dead-set on driving rates higher to fight it. This economic recovery is shaping up to be a lot different than the last one, at least in the post-pandemic recovery phase. Of course, we will still be in a technological revolution. But the torrid outperformance of that sector is likely to decrease.
The dominance of one type of stock has always given way to a reversal in the past eventually. And growth stocks are just coming off a long period of unprecedented dominance. Value stocks are long overdue to perform better. And that process may be just beginning.
So far this year, the growth ETF IVW is down about 29% while the value ETF is down 16%. While it’s a relatively new development (Growth peaked in November 2021), the environment is clearly changing and those changes are already reflecting in performance. It’s a good bet that value stocks, amid high inflation, rising interest rates and market volatility, will outperform growth over the course of the year.
Here’s a great value stock to buy now.
Intel Corporation (INTC): The Best Value Stock Today?
Intel is an icon of the technology revolution. The company makes chips or processors that are essentially the brains of the computer. It is one of the largest semiconductor companies in the world, with $79 billion in annual revenue, and holds by far the largest market share of the PC and server processor markets. The company has maintained its position at the forefront of technology by investing heavily in R&D.
But lately it has been getting its butt kicked by the competition, mainly Advanced Micro Devices (AMD) and Nvidia (NVDA). These companies are grabbing market share and have had torrid earnings growth with huge returns over the past several years (435%. and 182% returns over the last five years respectively).
But Intel has been an abysmal performer, returning -50% over the past year and -30% over the last three years. INTC has not typically been a value stock but the current cheap valuations make it one now.
What happened? To make a long story short, Intel missed the boat on smartphone chips. Intel is king of the PC (personal computer) chips, but that market is stagnating. The growth had been in mobile devices and smartphones. Competitors cornered that market and Intel was never able to break in. And there’s been more bad news lately.
In the spring Intel announced that production problems would delay the rollout of its next generation of chips due to problems in the manufacturing process, giving an opportunity to the competition. INTC plunged 10% on the news. Then, in February, Intel reduced 2022 earnings guidance to $3.50 per share from $5.47 in 2021, a decline of 36%. The market didn’t like that either.
The reason for the dip in this year’s earnings is because Intel will focus on the future by investing a record $27 billion on new products, compared to capital expenditures of $18.7 billion last year and $14.3 billion in 2021. Intel is rolling up its sleeves and taking on the competition. The company had been the best in the business on such investments and still has a lot of mojo left. There are some hugely promising growth opportunities.
Intel is already making strong inroads into the gaming and data center CPU market. These are highly profitable and growing markets that have been dominated by the competition. But Intel has superior chips coming out in the next year.
Intel is also planning to aggressively expand its foundry business, where chips are manufactured. Intel recently made a $5.4 billion acquisition of foundry company Tower Semiconductor that should close around the end of this year. Also, the company announced a $30 billion partnership with Brookfield Infrastructure (BIP) to jointly fund a semiconductor fabrication facility.
So, we have a technology icon that sells at a dirt-cheap price and valuation after having been pummeled by a barrage of bad news. The company is also flexing its considerable innovation prowess that made it the best in the world and focusing on high growth businesses and taking on the competition. It’s cheap ahead of what is likely to be very profitable decade.
Aside from Intel (INTC), what do you think are the best value stocks today? Give us your candidates in the comments below!