2018 MAKING THE CASE FOR VALUE INVESTING

Stock markets this year have been off to a volatile start and investors should expect this to continue throughout 2018. Recent strong economic news indicates we are entering a period of inflation and should expect to see interest rates rise. Geopolitical instability will impact commodity prices, and finally it is normal and healthy for markets to go through a period of consolidation after a very strong 2017.

There is a theory called “reversion to the mean”: over the long-term investments will return to their average performance. The market has been a roaring bull since the 2016 U.S. Presidential election and it needs to catch its breath and consolidate. The past decade has generated a 159% return for growth stocks, and an 89% return for value stocks.

According to this theory, growth stocks may be overreached, and value stocks have more upside potential. Combining this with the relative stability of value stocks during periods of volatility and we can understand why Wellington Capital Group analysts are making a strong case for investing in value stocks this year.

WHAT ARE GROWTH AND VALUE STOCKS?

Growth stocks are shares in fast growing companies. They tend to increase in capital value rather than income, and trade at higher P/E ratios. Their earnings are expected to grow at above average rates relative to the overall market. Investors are buying potential future earnings. Growth stocks tend to trade at a premium during bull markets, and get hit harder during corrections. Over-hyped startups and scams lurk among the high fliers, so remember what your grandmother told you about putting lipstick on a pig.

Value stocks are by definition stocks trading at attractive prices. They are generally shares of ownership in stable, mature companies. They may include companies that are trading at a discount because they are under the radar and overlooked or have had recent bad press.

Another area are mid-caps that are not large enough for major investment firms to justify having their research department spend time covering them. Also, review industry leaders in out-of-favor sectors. Look for strong fundamentals and shares in companies priced lower relative to their peers.

Imagine a tug boat and a windsurfer in a storm. Where would you rather be? Value stocks are anchored by their financial ratios, with lower Price/Earnings and lower Price/Book ratios. The analogy is that when the wind blows, they don’t get knocked around as much.

3 VALUE TRAPS

As the saying goes, there is no free lunch. Companies that may be classified as value stocks many not be valuable to investors. There are three things to be weary of for the duration of 2018:

1. Yield – Stocks with high dividend yields will get hurt if interest rates rise. The financial sector is vulnerable in this regard.

2. Utility Companies – These are the classic, traditional conservative investment but there are two problems right now. High dividend yield, as previously mentioned, and a tendency to be sluggish during periods of inflation and the current deregulatory environment.

3. Cheap - sometimes there is a reason something is priced lower. It does not always mean undervalued. An intelligent investor reviews the fundamentals and unreported issues, looking out for a scam or a pending lawsuit, for example.

WHERE TO LOOK FOR VALUE STOCKS?

Japan. The Nikkei is trading at a P/E ratio of 17 on an index weighted basis, and P/E 13 on a market cap basis. Comparing US shares, the DJIA is trading at P/E 27 (up from P/E 21 one year ago). In addition, investors benefit from the Japanese Yen’s safe haven status. Honda is an excellent example. It is a Japan-based car manufacturer that trades in Tokyo and on the NASDAQ.

The sector was out of favor and having a resurgence. It’s an established, stable company that is currently undervalued: trading at P/E 7, P/B 0.86 and Yield 1%.
European telecoms are another promising area for value investors in 2018. The Telecom sector is trading at a historic low, fundamentals are improving and years of 4G infrastructure investment are about to start generating solid cash flows.

The U.S. Dollar is likely overvalued against the Euro, another reason to look to European markets for a pick in this sector.

Healthcare is a classic defensive sector in the US right now. It is undervalued compared to the overall market, will benefit from federal tax cuts and has an opportunity to repatriate cash. This is a historically defensive sector and generally less volatile during market corrections. People get sick regardless of the market, some even more so during a sharp selloff.

ABOUT WELLINGTON CAPITAL GROUP

Wellington Capital Group manages assets for private clients from around the world. They work with a diverse clientele, including expatriates and individuals and organizations seeking offshore expertise. People interested to review their current investments are invited to contact the Tokyo office and speak with an investment advisor. For more information please visit the website wellington-capital-group.com or watch our company review video

Author's Bio: 

Rasel Khan is an internet entrepreneur