Why Value Stocks May Again Beat Growth in 2023

For 40 years, and especially since 2015, growth stocks beat value. But last year the tables were turned.

From 1980 through 2021, , and especially since 2015, growth stocks outperformed value stocks.

But last year value stocks vastly outperformed growth, with the Russell 1000 Value Index losing 9%, compared with a 30% drop for the Russell 1000 Growth Index. The Russell 1000 includes large-cap stocks.

Recall that value stocks are ones considered undervalued according to measures such as price-to-earnings and price-to-sales multiples. 

Growth stocks are those expected to grow earnings and sales at a faster rate than the market average.

The surge in interest rates led growth stocks to underperform value last year. Rising rates depress economic growth, hurting growth stocks’ earnings.

Meanwhile, defensive value stocks such as utilities, consumer staples and health care benefit from the fact that demand in these industries holds up in bad economic times.

Sarah Ketterer Picks Alstom and Prudential

Many experts expect value stocks to continue to perform well this year and beyond. “If interest rates stabilize [at high levels], it’s good for value stocks,” Sarah Ketterer, chief executive of the $34 billion-asset Causeway Capital Management, told TheStreet.com.

Numerous economists expect the Federal Reserve to continue to raise rates early this year and then leave them on hold for the rest of the year.

“Many companies are underearning compared to what they can achieve. They face some headwinds,” Ketterer said.

Among the value stocks she likes are French railway company Alstom  (ALSMY)  and Prudential  (PUK) – Get Free Report, a British insurance and asset management company.

Sarah Ketterer

Causeway Capital Management/TheStreet

Alstom “had a problematic acquisition in 2021. Then the stock collapsed,” Ketterer said. “But management is very capable. The company has a better order book now and a significant improvement in cash flow.” The stock could soar 60% to 80% over the next two to three years, she said.

“The rail sector is likely to grow, partly due to the need for green transport. Management can continue to make this a better business,” Ketterer said.

Bierig Likes Oracle and CBRE

Robert Bierig, a manager of Oakmark Fund and Oakmark Select Fund, also is bullish on value stocks.

“What is unusual today is that the spread between companies with high price-earnings ratios and companies with low ones is wider than is typically the case,” he told TheStreet.com.

“That’s a good setup for stock pickers to add value because it means there may be more opportunity than usual in low p-e stocks. … We think more traditional value names tend to be attractive.”

Bierig cited Oracle  (ORCL) – Get Free Report and real estate company CBRE  (CBRE) – Get Free Report as strong value stocks.

Robert Bierig

Oakmark Funds

“In applications, Oracle’s strategic back-office cloud business is growing annualized revenue 25% to 30% in constant currency,” he said. “In infrastructure, Oracle’s cloud services and autonomous database are growing even faster.”

Those are important trends, Bierig said. “As these next-generation businesses become a larger percentage of total revenue, Oracle’s overall revenue growth rate is accelerating close to double-digits after many years of flattish results,” he said.

“At only around 12 times our estimate of normal earnings excluding cash, we think this is a cheap stock.”

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