Kip 25 Update: Value Stocks Show Signs of Life

After lagging their growth-oriented counterparts for a decade, value-priced stocks stumbled even more when COVID arrived, says Charles Pohl, a comanager of the value-minded fund Dodge & Cox Stock (DODGX (opens in new tab)), a Kip 25 selection. Growth stocks beat value stocks by a cumulative 233 percentage points over the 10-year period ending in September.

“It’s the biggest 10-year divergence ever,” Pohl says.

But value stocks have shown signs of life lately, boosting Stock, which logged a 12-month return of 12.7% through Dec. 4. That lagged the S&P 500 Index, but beat the 5.5% return of the Russell 1000 Value Index, which tracks bargain-priced large-company stocks.

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DODGX's healthy dose of stocks in the financial sector (26% of assets) and energy (7%) relative to the broad market were a drag in early 2020. But later in 2020, these stocks have rallied on sentiment that a vaccine could bolster an economic recovery.

Investors, says Pohl, “are starting to look through the downturn that was created by COVID.” Shares in Bank of America (BAC (opens in new tab)), Capital One Financial (COF (opens in new tab)) and Wells Fargo (WFC (opens in new tab)), all top-10 fund holdings, each gained more than 20% in the three-month period ended Dec. 4, beating the 10.4% gain in the S&P 500.

But short-term returns aren’t the focus of the eight managers at Dodge & Cox Stock. They like to buy with an eye toward holding stocks for at least three to five years, and typically longer. They invest in companies that have good long-term prospects for earnings growth and cash-flow generation, and that are also cheaply or reasonably priced.

Stock’s 10-year annualized return, 12.4%, beats the Russell 1000 Value Index and 93% of the fund’s peers (funds that invest in large companies with bargain-priced stocks). But it lags the S&P 500.

Despite the recent rebound, there’s still a wide disparity in valuation between growth and value stocks by standard measures, including price-to-earnings, price-to-book-value and price-to-sales ratios. Historically, says Pohl, that has been a good predictor of value stocks taking the lead.

“It has been an extremely tough decade for value stocks and for value stock fund managers,” says Pohl. “But that’s a good setup for a good run going forward.”