Investors Are Shifting from Growth to Value
I had breakfast with my little brother Adam this past weekend. Adam is a surveyor and works for a local company that gets hired by all the major developers here in Atlanta.
I always love hearing what Adam is working on because it gives me a good feel for what areas are experiencing the most growth and which companies or industries are expanding into new locations.
Adam told me that lately he’s been doing nothing but measuring property lines, new road plans, and all the infrastructure plots for new neighborhoods all around our area.
“They are building houses as fast as they can get the sitework done! And it sounds like they’ve got a backlog of work to keep setting up new neighborhoods for the rest of the year!”
Of course, that shouldn’t surprise you if you’ve been reading our daily alerts.
We’ve talked multiple times over the last few months about how low interest rates have helped boost demand for new homes. And even though prices for these homes have been moving higher, the homes are still affordable to buyers because their mortgage payments — the REAL cost of buying a house — are lower thanks to low interest rates.
On top of the affordability factor, there is a whole generation of young adults now ready to start their own families. This means moving into their own place, buying furniture and appliances, and plenty of additional stuff.
(I remember when we moved into our first place — on a shoestring budget — my wife told me that we NEEDED throw pillows, special curtains, and other decorative things. Because apparently that’s what you need when you move into a new place…)
It’s a good time for consumers to be buying all of these things. Because the U.S. job market continues to be very strong and wages are rising. And that gives shoppers plenty of extra money to spend and helps to keep our economy growing — despite what you may have heard on TV or in the newspapers about challenges to our economy.
So at this point, I’m still very excited about our investment opportunities. And the market has been holding up very well and is just below all-time highs.
Still, despite the strong market action, there are some subtle shifts going on below the surface that I want to talk about today. And these subtle shifts will give you a chance to make more money from this healthy environment.
The Biggest Shift I’m Seeing Right Now — The Move from Growth to Value
There are a couple big shifts that I’m keeping a close eye on in the market right now.
The biggest is how investor preferences are shifting away from the market’s fastest-growing stocks and towards the market’s slowest-growing (otherwise known as value) stocks.
On the winning side of this shift are value stocks that have been totally avoided for years.
In recent history, investors have relentlessly sold value stocks from their portfolios in favor of growth stocks.
This has led to some very expensive growth stocks. And it’s caused prices of value stocks to drop — or at least not keep up with the broader market.
Take for example Goodyear Tire & Rubber (GT). This slow-growth “value” stock is only trading for 6.3 times next year’s earnings. But it pays a 4.9% dividend. That’s tremendous value!
Or Delta Airlines (DAL) that’s trading at less than 8 times next year’s earnings while paying a 2.75% dividend.
Keep in mind the S&P 500’s average P/E is 22.2!
Just making up half the difference to a 14 P/E ratio would cause DAL to trade from its current price of $59 to over $100. And it would still be cheap!
But we’re starting to see the tide shift.
Investors are moving capital back into value names because they’re so dang cheap. And also because many of these value names pay great dividends.
This creates potential for some exciting gains (I’m talking about quick 20%, 30%, and even 50% pops) from stocks that you would think are stodgy and old, boring names.
If you’ve kept up with The Daily Edge and our recommendations for your portfolio, odds are you’re already invested in a lot of companies that should benefit from this shift.
However, if you’re new to our e-letter or haven’t quite allocated enough of your funds to value stocks, I recommend doing so soon.
The shift we’re seeing right now by investors, coupled with the high dividend payments that these companies are notorious for paying, offer a fantastic risk-reward opportunity for anyone invested in today’s market.
Here’s to growing and protecting your wealth!