The Run-Up Into Value Stocks May Soon Fizzle Out

The Run-Up Into Value Stocks May Soon Fizzle Out

Michael Kramer  | Sep 27, 2019 19:48

This post was written exclusively for

For a short time, it seemed that momentum stocks were falling out of favor as investors rushed into value names, as measured by the iShares EDGE MSCI USA Value (NYSE:VLUE) and the iShares EDGE MSCI USA Momentum ETF (NYSE:MTUM).

But suddenly the value trade seems to be fading, with the value ETF showing signs that a steeper 7% decline may lie ahead, based on the technical charts.

There is likely a good reason why that trade is fizzling out: the companies that represent value have little to offer investors in terms of future growth, when using consensus analysts’ estimates.

Companies such as AT&T (NYSE:T), Intel (NASDAQ:INTC), IBM (NYSE:IBM), Pfizer (NYSE:PFE), and General Motors (NYSE:GM) all represent some of the biggest weightings in the value ETF. When considering their growth rates, these stocks seem overvalued based on forward earnings multiples.

MTUM chart

Value Rising

Since the middle of August, the value ETF has risen by over 7.6% versus the momentum ETF’s decline of 1.6%. However, the value ETF peaked on Sept. 11, when it was up nearly 11.5%, while the momentum ETF has traded virtually sideways.

The Break Down Nears

The technical chart shows that the value ETF has been rising and falling in a well-defined trading channel since May. Now, the ETF is resting on a level of support around $81.70. A decline below that price could result in the ETF falling back to the bottom of the trading range around a price of $76.50—a decline of about 6.75% from its current price of approximately $82.03 on Sept. 26.

VLUE chart

Overvalued Value Stocks

One reason for the group’s sharp rise may be due to a big jump in AT&T, which represents an almost 10% weighting in the ETF. AT&T has seen its stock jump meaningfully in recent weeks since Elliott Management Corp. announced it built a stake in the company. Because AT&T has such a big weighting in the ETF, the sudden rise in its shares price may have helped to pull the whole group higher.

When digging into AT&T, one must wonder what value the company represents. Shares trade for roughly 10.3 times 2020 consensus earnings estimates of $3.61 per share. Those current earnings estimates represent growth of just 1.95% versus estimates for 2019 of $3.54 per share. But even worse, analysts are forecasting earnings to decline in 2021 to $3.57 per share.

Group chart

Intel is another company that has seen its shares rise sharply, along with the rest of the semiconductor space in September. However, like AT&T, analysts estimate that earnings will rise by just 1.3% in 2020, followed by a flat 2021. Meanwhile, the stock trades with a one-year forward PE ratio of 11.4.

IBM, Pfizer, and General Motors all fit into a similar camp. The three companies combined represent almost a 9% weighting in the ETF. IBM is forecast to have earnings growth of just 5% in 2020, Pfizer is forecast to have its earnings decline by 3.6%, and General Motors earnings are expected to fall by 2.5% based on the latest consensus estimates.

It is true that all of these companies trade at earnings multiples that are less than the S&P 500’s 2020 PE ratio of 16.5. However, the S&P 500 is also forecast to see its earnings grow by almost 10% in 2020. So one must wonder, just how much value do any of these companies provide when compared to the growth of the S&P 500.

Perhaps in this low-interest-rate environment, with 10-year Treasury rates below 2%, valuation can be supported by some of these companies' very attractive dividend yields. However, the value trade is likely not to last unless these companies can begin to present investors with better underlying fundamentals.

Otherwise, all investors would be left with is overvalued companies disguised as value stocks. For that reason, any rally in this group is likely to fade fast.

Michael Kramer

Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (UK) English (India) English (Canada) English (Australia) English (South Africa) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Polski Português (Portugal) Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
Saving Changes


Download the App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors. is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.