Value has been in a protracted slump versus growth for years, but it’s been undergoing something of a makeover during that time.
Whether it’s Benjamin Graham and David Dodd or Eugene Fama and Kenneth French, you might excuse value investors for the occasional name drop, given the style’s distinguished history. Stretching back to the times of the New Deal, investors have been actively scouring markets for fundamentally sound companies trading at a discount to their intrinsic value.
From a building-block lens, value was one of the original equity factors Fama and French isolated in the early 1990s—based on characteristics that define sound businesses with upside potential and discounted valuations that have produced an attractive track record over time. If we extend the value factor’s history back to the late 1920’s using Fama French, it has outperformed growth by an annualized average of about 4.4%.
But value entered a protracted slump around the time of the Global Financial Crisis, with growth investing’s surge in popularity. While value stocks began to show signs of a recovery in the third quarter of 2024, for the better part of 15 years, value has been in a relative wilderness, with asset inflows largely relegated to an occasional passive play on the value factor. These episodes were often triggered by a macro development—whether elections and policy uncertainty, inflation concerns or something else.
During this painful stretch, however, the value world was undergoing something of a transformation.
A Venerable Equity Style Undergoes a Makeover
For one thing, the composition of the value universe was evolving. Generally, value has mirrored the makeup of the US economy, which has historically been manufacturing-led. As the economy has transitioned to one driven much more by information and services, value indices have followed suit.
Today, value companies are often less about things like assets and price to book value. Increasingly, they’re more about things like free cash flow, which knowledge-based and customer-service businesses will produce—and which we believe the market is misvaluing. So the nature of how portfolio managers and research analysts look at value itself has been evolving.
Of course, the value playbook still calls for exploiting investors’ tendency to overreact to short-term events. Historically, that overreaction has focused more on troubled companies in macro-sensitive industries such as banks or energy or retail, which tend to slow when the economy slows. Today, investors are underreacting to the cash earnings power of value companies. In fact, value firms’ earnings growth has been consistent with historical patterns, whereas investors are less willing to pay for these earnings today. As a result, value investors can access industry leaders that are growing earnings and market share with high profitability and long runways at attractive valuations.
Essentially, there’s growth in value.
An Evolving Universe Tees Up Opportunities
In our view, these dynamics create opportunities across the company size spectrum.
In large-cap, there are well-known companies whose financial metrics or business models might be less understood by investors. Progressive, for example, is a well-known insurer but it has also been a big—and early—adopter of tech to enhance operations and profitability. Many investors know Walmart, but perhaps not the magnitude of its structural advantage in the grocery business, including its ongoing adoption of tech in many aspects of its business.
In the small-cap arena are firms investors may not know—sometimes with businesses investors don’t know exist. Everyone knows that chips power the tech world, but chip manufacturing requires silicon wafers, and wafers need testing. Form Factor, a semiconductor test and measurement supplier, manufactures probe cards to enable that testing. Think of it as part of the AI supply chain.
Ryman Hospitality Properties may be known for its musical venues, but maybe not for its lodging business, which includes sprawling hotel/entertainment centers—a unique space within the lodging sector that requires specific expertise. A sizable share of the mid-cap market features firms that we believe control their own free-cash-flow destinies and aren’t influenced by macro factors as much as segments such as energy and banking are.
Global Themes, Value Opportunities
Many company opportunities relate to broad global themes—onshoring and energy are two notable ones. As firms seek to de-risk supply chains by bringing links back onshore, this massive effort requires investment across the spectrum. This includes areas such as logistics, warehouses and inventory-management systems as well as factories and roads—not to mention the technology to manage it all. Many companies that provide the needed building blocks for these supply-chain links live in the value universe. We think investors who can dissect these building blocks can find opportunity.
The same holds true for energy, as we see it. Whether by facilitating the creation of capacity to alleviate shortages of natural gas or enabling the building of new ports to accommodate shipping, many firms are working behind the scenes and positioned to benefit. The growing presence of data centers, in part to support AI, necessitates more power from utilities. And as renewable energy sources continue to expand, more facilities must be built and power grids upgraded. A host of companies play a role in making this happen.
To sum things up, investors eyeing the S&P 500 today might be anxious about valuations near all-time highs and returns driven by a handful of names—notably the Magnificent Seven. On the other hand, the rest of the equity market offers what we call “magnificent others.” Value seems to be a member of that club today, with its evolved company mix, solid growth potential and reasonable valuations. We think active investors who do the work can find plenty of growth in value.
