Buy the Dip? Consider These Value Stocks and ETFs Instead.

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Value stocks may take an edge over growth stocks this year as companies that have been hit hard by the pandemic bounce back.

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Sebastian Salome-Gomis/AFP/Getty Images

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Buy the dip, wrote JP Morgan strategists earlier last week. As courage calls for, it wasn’t exactly Churchill during the Blitz.

The decline in this case was a 2% decline in the S&P 500, year over year, not counting dividends, bringing its 10-year profit to 261%. Furthermore, many of the biggest individual dippers this year have been less profitable highfliers such as cloud player Snowflake (ticker: SNOW), or assets backed by suspended antitrust such as crypto.

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But these are hesitations. I take JPMorgan’s broader point, that the expected rise in interest rates doesn’t have to derail stocks. Yes, the US inflation rate just hit 7%, the highest since 1982, when E.T. was calling home and the rich kid on my street found a Commodore 64 computer—his old man worked for IBM. . And yes, there is growing consensus that some of that excess inflation will persist, and that action is needed.

“The problem is that inflation mindset becomes embedded in prices and wages, for the Fed to respond with hitting the economy on the head with a brick,” says Edmund Bellord, portfolio manager at Harding Lavner.

But the starting point for rates after adjusting for inflation is so sharply negative, he says raising rates may not be so bad for stocks.

JPMorgan now compares it to late 2018, when rate hikes spurred stock sales, and the Fed subsequently reversed course. At the time, the starting point for real rates was positive, and the economy was weakening. This year, the bank predicts, will be characterized by the end of the pandemic and a full global recovery. It rests on the expectation that “Omicron’s low severity and high transmissibility exclude more severe forms and lead to widespread natural immunity.” I, for one, can’t wait to go back there this year and refuse to travel because of runaway pricing, rather than fear of infection.

Instead of buying Bob, or Waffle, or whatever the market is meant to drop significantly, consider buying something that is rising: value stocks. The Invesco S&P 500 Pure Value Exchange Traded Fund (RPV) is up 7% this year. It tracks a basket of large US companies that appear to be affordable relative to earnings, sales and book value of assets. The Invesco S&P 500 Pure Growth (RPG), which positions companies with strong earnings growth and price momentum, is down 7%.

Lower interest rates flatter the valuation math on growth stocks; When bond yields are minuscule, investors can invest in promising companies whose cash flows won’t grow for years. Using the above ETFs, growth has outpaced value by nearly 100 percentage points over the past decade.

During the pandemic, the performance gap has widened, as the Federal Reserve has used bond purchases to reduce yields even further, and spending growth has shifted in favor of online services.

Solita Marcelli, America’s chief investment officer at UBS Global Wealth Management, says the price-to-earnings ratio for growth stocks has increased from 22 to 31 during the pandemic, while that for value stocks has risen more modestly from 13 to 16. It is done. , The difference between the two current numbers—15—comprises the historical average of six.

According to Credit Suisse, ironically, value stocks could generate earnings growth faster this year than growth stocks. That’s because companies that had been hit hard by the pandemic tended to bounce back as it came to an end.

The past decade has seen many false starts for change in value stocks. It could be one of them if the economy falters, inflation calms down, and nearly zero interest rates remain. Either way, a wholesale change in value stocks is unwise.

“There’s still this huge digitization effort in corporate America,” Marcelli says. “Are we saying that value is going to outperform growth for the next five years? Not necessarily.”

But looking at returns over the past decade, the S&P 500 Index has performed more like that growth ETF than the value one. That’s because indexes and growth ETFs have often been dominated by world-beating tech giants. It has worked well, but it has also left passive investors on growth.

A simple adjustment is to buy a value ETF. It’s a less-than-simple to shop individual stocks among the value-for-money names that are ahead of the market this year. A Quick Scan of the S&P 500 Healthy gains for Cummins (CMI), Royal Caribbean Group (RCL), Deere (DE), Chevron (CVX), Citizen Financial Group (CFG), Ford Motor (F), and ViacomCBS (VIAB) shows. ,

I am concerned about the United Kingdom. The new CEO of Anheuser-Busch InBev (BUD), the world’s largest brewer, Michel Douceris, tells me he’s selling so many home beer taps out there that they’ve become more than pubs now. How does one get out of the house? If you haven’t heard from friends out there in a while, check in or at least send pretzels.

The order of doucheris is tall. AB InBev continues to outpace the beer industry, but its stock returns have plummeted over the past decade. Demand has changed, especially during the pandemic, to spirits and fizzy, fruity goods in cans, such as hard seltzers and ready-to-drink cocktails.

AB InBev has those too, but it’s steeped in beer. Doukeris says this is a time for growth and delivering.

Growth will come from new products around the world, such as Cruel Fruits in South Africa and Cutwater Spirits in the US, and new services such as cold beer delivery in 30 minutes or less in some markets. Good news, Florida: Doukeris says it’s testing tap home beer in Miami.

It also plans to make full use of AB InBev’s scale. Some ideas seem more immediately deliverable than others. Selling more marketing, distribution, financial and technical services to smaller players? Understood. Turning spent grains into protein for me to dig into dinner? Not even after hitting a six of the cruel fruit.

Write Jack Hough at [email protected] follow him on twitter and subscribe to Barron’s Streetwise Podcast,

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