Stock market seeing shift for first time since financial crisis, 3 recommendations

Reuters / Brendan McDermid

• Value stocks have gotten crushed by their more
  growth-driven peers over the course of the nine-year bull
  market, but the tide appears to be turning in their
  favor.
• Investors looking to play the recent value rebound
  would be well served to seek out the three industries that
  carry the heaviest weightings in the Russell 1000 Value
  index.

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Don’t look now, but a much-maligned area of the stock market appears to be mounting
quite the comeback.

We’re referring to so-called value stocks, or equities
characterized by their bargain pricing, relative to the rest of
the market. They’ve beaten their growth-stock brethren by 4% over
the past three days, the biggest outperformance since May 2009
for a period of that length, according to data compiled by
Business Insider.

Put simply, value is having a resurgence not seen since the
aftermath of the financial crisis.

Joe
Ciolli / Business Insider, data from Bloomberg

To best understand why this reversal is such a big deal, consider
that value stocks have lost a cumulative 40% relative to their
expensive peers worldwide since 2009, and have trailed the
broader market by 17% over the period, according to Bernstein
data.

The reason why is straightforward: As stocks have climbed higher
in seemingly unstoppable fashion, there’s been no reason to seek
bargains.

Proven winners — most notably in the mega-cap tech space —
have continued to dominate. And as traditional measures of
valuation have gotten stretched, investors have shrugged and
stayed the course, citing robust
profit growth
and easy
lending conditions. That’s all come at the expense of the value
trade.

So what does it mean if the value resurgence is here to
stay? For one, it throws a bit of water on the idea that the
market is in a late-cycle environment, since such periods have
historically seen growth stock outperformance. I
t
also throws a bone to value investors, who have struggled to keep
pace with their more growth-driven peers. 

With all of that established, the question becomes what
you, the average investor, can do to benefit from a value
rebound. The key lies within the areas that occupy the heaviest
weightings in the largely downtrodden Russell 1000 Value
index: financials, healthcare, and
energy.

A quick check from the past week shows these groups have,
in fact, been leading the market as long-standing outperformers
like mega-cap tech falter. It appears, for the time being at
least, that as historically stretched tech stocks lose their luster, traders are
content to rotate into unloved areas, rather than completely exit
the stock market.

It also doesn’t hurt that the biggest financial firms in
the US are coming off a stellar earnings season, led by strong
results from JPMorgan. Meanwhile, healthcare companies have
enjoyed the highest percentage of positive earnings surprises,
according to Goldman Sachs data. And energy, ever-beholden to the
price of oil, has arguably the biggest upside, should the
resource maintain the steady ascent its seen over
the last 12 months.

In the end, an open-minded investor could do a lot worse
than exploring the value stock universe for bargain-basement
opportunities, especially amid the resurgence that appears to be
underway.