It's been a long time coming, but the great value comeback appears to be underway.
The value school of investing, to which I adhere, seeks to find stocks selling for bargain prices compared to their intrinsic net worth. In the 30 years through 2009, value outperformed growth 19 times. That included a streak of seven years in a row from 2000 through 2006.
The growth school seeks stocks with rapidly rising earnings. It did great in the past decade, beating value seven times out of 10. Last year, growth stocks rose 36.9%, while value stocks gained 0.25%.
Those figures are total returns for the Russell 3000 Growth Index and Russell 3000 Value Index.
Now, value is making a long-awaited comeback. So far this year, the Russell 3000 Value Index is up almost 11%, while its growth counterpart is down 0.5%.
Will it last?
I think the value comeback will last, for at least three reasons.
First, interest rates are rising, which affects the formulas used to value stocks. Say you think Amazon.com Inc. (AMZN, Financial) will earn $100 a share in 2030. What should you pay for that? The answer is the present value of $100 nine years hence, which is more when interest rates are low, less when they are high.
Second, the vogue for index investing, which reached a crescendo last year, may dissipate now that many active investors are (finally) beating the index.
Indexing helps big-cap growth stocks such as Apple Inc. (AAPL, Financial), Microsoft Corp. (MSFT, Financial) and Amazon because they dominate the Standard & Poor's 500 Index and many other indexes. If indexing becomes less popular, this source of demand dries up.
Third, the economy is revving up, so big technology stocks won't be the only ones showing impressive earnings growth. When growth is rare, it's more precious. But soon, a broader swathe of stocks will be showing sharp earnings increases.
How to play it
If you believe, as I do, that the value comeback will last, here are six stocks you might want to buy. Each has a price-earnings ratio (or stock price divided by the past four quarters' earnings per share) of less than 15.
Biogen Inc. (BIIB, Financial) is a biotechnology company with 10 approved drugs on the market and more than two dozen in the pipeline, including several that are in phase 3 (large-scale double-blind) trials.
The stock jumps around based on perceived prospects for the company's Alzheimer's disease drug, Aducanumab. My take is that the stock is a value even if that drug flops. The stock sells for 11 times recent earnings.
D.R. Horton Inc. (DHI, Financial) is the largest U.S. homebuilder, selling homes in about 29 states at a variety of price points. In the past 10 years, it has increased its sales by about 18% a year and earnings by more. Yet, perhaps because investors are scared of cyclicality, the stock sells for 11 times earnings.
Seneca has been profitable in 14 of the past 15 years, and very profitable lately. Because it usually operates on thin profit margins, the price-earnings ratio is only four.
During the pandemic, Turtle Beach Corp. (HEAR, Financial) has sold a lot of its high-end headphones used by gamers and audiophiles. Will sales peter out as the pandemic abates? That's a valid question, but I think the company can hold onto a good percentage of its customers.
Turtle Beach shares sell for 13 times recent earnings, and the company is debt-free.
Investment banking and brokerage are feast-or-famine businesses. But I think this stock will be good for at least a year. It sells for only 5 times recent earnings, and only 77% of book value.
Speculatively, I like Surface Oncology Inc. (SURF, Financial), a Cambridge, Massachusetts, early-stage biotech company. It is working on therapies that modify the spaces in and around tumors, which may made other drugs more effective against them.
Though it has no approved drugs yet, Surface has partnerships with larger companies such as GlaxoSmithKline TK (GSK, Financial) and Novartis (NVS), so it already has some revenue. The stock sells for about 6 times recent earnings.
Disclosure: I own D.R. Horton and Apple personally and for most of my clients. I own Turtle Beach personally and in a hedge fund I manage. My wife and some clients own Amazon.com. and Microsoft.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].