MW The time may be right for value stocks - here are Wall Street's favorites
By Philip van Doorn
Investors have been looking beyond Big Tech in recent trading, signaling a possible shift to a value focus
Last week may have been the start of something that investors have been warned about - or have looked forward to - for some time.
This would be a change of direction for the U.S. stock market, away from the handful of technology giants that have dominated the S&P 500's SPX performance for the past couple of years and toward other pockets of the market that have been overlooked.
MarketWatch's William Watts recently explained the forces behind a possible market rotation toward value stocks that have been overlooked during this bull market, and what it might take for investors to maintain such a broad move.
Our Joseph Adinolfi also talked to analysts who expect a broadening of interest in sectors of the market that have been trailing tech stocks.
Below is a screen of the Russell 1000 Value Index RLV, showing which stocks are most favored by analysts working for brokerage firms. Another list shows the companies with the highest weightings in the index.
A real rotation?
The big driver of this new thinking was the first decline in the consumer-price index in four years, reported on Thursday. This led to the usual speculation that the Federal Reserve may soon begin a cycle of cuts to the federal-funds rate, which is currently in a target range of 5.25% to 5.50%.
Now take a look at last week's performance of several exchange-traded funds:
Company Ticker One-week price change through July 12 2024 price change through July 5 SPDR S&P 500 ETF Trust SPY 1.0% 16.7% Invesco S&P 500 Equal Weight ETF RSP 3.0% 3.7% iShares Russell 1000 ETF IWB 1.1% 15.5% iShares Russell 1000 Value ETF IWD 2.8% 5.2% iShares Russell 1000 Growth ETF IWF -0.3% 24.7% Source: FactSet
The table provides some insight into investors' moves last week, with price changes excluding dividends.
The $559 billion SPDR S&P 500 ETF Trust SPY tracks the S&P 500, which is weighted by market capitalization. This means the ETF and the U.S. large-cap benchmark index are dominated by a handful of companies. The largest 10 holdings of SPY make up 37.5% of the fund's portfolio. The largest three - Microsoft Corp. $(MSFT)$, Apple Inc. $(AAPL)$ and Nvidia Corp. $(NVDA)$ - make up 20.9% of the portfolio.
The market-cap weighting has worked out well for investors in many index funds. But the table points to a change in thinking - investors' interests broadened last week. The Invesco S&P 500 Equal Weight ETF RSP rose 3% last week, while the cap-weighted SPY rose 3%. Among the S&P 500, 422 stocks rose last week, according to data provided by FactSet. Through the previous week ended July 5, only 292 of the S&P 500 were up for 2024.
Looking again at the table, it includes three exchange-traded funds that track the Russell 1000 Index RUI and its Value RLV and Growth RLG subsets. Last week, the iShares Russell 1000 Value ETF IWD was the best performer of the three, by far.
Value-stock screen
The Russell 1000 Index is made up of the 1,000 largest companies in the Russell 3000 Index RUA, which itself is designed to capture 98% of the U.S. market for publicly traded common stocks. According to FTSE Russell, the Russell 1000 represents about 93% of the Russell 3000's market value.
There are 872 companies in the Russell 1000 Value Index. This large subset of the full Russell 1000 includes companies with relatively low price-to-book ratios, lower growth estimates for the next two years and lower sales-growth figures over the past five years. You can read more about FTSE Russell's selection and weighting methodology for the index here.
Before screening the Russell 1000 Value Index, here is a list of the 10 largest holdings of the iShares Russell 1000 Value ETF:
Company Ticker % of IWD portfolio Share of "buy" ratings July 12 price Cons. price target Implied 12-month upside potential Dividend yield Berkshire Hathaway Inc. Class B BRK.B 3.27% 67% $424.44 $460.11 8% 0.00% JPMorgan Chase & Co. JPM 2.47% 67% $204.94 $218.80 7% 2.24% Exxon Mobil Corp. XOM 2.14% 55% $113.27 $132.03 17% 3.35% UnitedHealth Group Inc. UNH 1.84% 90% $511.53 $578.23 13% 1.64% Johnson & Johnson JNJ 1.52% 50% $149.88 $171.52 14% 3.31% Procter & Gamble Co. PG 1.28% 68% $166.61 $173.78 4% 2.42% Walmart Inc. WMT 1.26% 85% $69.24 $73.06 6% 1.20% $Bank of America Corp(BAC-N)$. BAC 1.19% 56% $41.59 $42.42 2% 2.31% Chevron Corp. CVX 1.13% 72% $155.59 $182.94 18% 4.19% Linde PLC LIN 0.89% 65% $440.70 $471.92 7% 1.26% Source: FactSet
Together these stocks make up 17% of the IWD portfolio, showing how much less concentrated it is at the top when compared with the S&P 500.
The table includes a summary of ratings among analysts working for brokerage firms polled by FactSet, along with consensus price targets and the 12-month upside potential implied by the targets. The table also includes dividend yields, based on payouts over the past 12 months.
For this first set of large companies in the Russell 1000 Value Index, sentiment among analysts tends to be favorable, but only four of the companies have consensus price targets that are at least 10% higher than Friday's closing prices.
Here is a screen of the Russell 1000 Value Index based on sentiment among analysts. First we cut the list to companies covered by at least five analysts polled by FactSet. Then we narrowed the list to 98 stocks rated "buy" or the equivalent by at least 80% of the analysts.
Here are the 20 remaining stocks with the highest upside potential implied by the consensus price targets:
Company Ticker Share of "buy" ratings July 12 price Cons. price target Implied 12-month upside potential Dividend yield Exact Sciences Corp. EXAS 92% $46.36 $80.14 73% 0.00% Royalty Pharma PLC RPRX 89% $26.77 $44.39 66% 3.14% United Airlines Holdings Inc. UAL 91% $44.72 $71.16 59% 0.00% Amer Sports Inc. AS 82% $11.95 $19.00 59% 0.00% Astera Labs Inc. ALAB 91% $55.89 $87.91 57% 0.00% Enovis Corp. ENOV 83% $46.03 $72.10 57% 0.00% IAC Inc. IAC 92% $48.67 $76.09 56% 0.00% Roivant Sciences Ltd. ROIV 92% $11.35 $17.00 50% 0.00% Darling Ingredients Inc. DAR 85% $38.00 $56.21 48% 0.00% Wynn Resorts Ltd. WYNN 80% $85.83 $123.42 44% 1.17% Perrigo Co. PLC PRGO 100% $27.48 $39.33 43% 4.02% Crane NXT Co. CXT 80% $57.14 $80.80 41% 1.12% Schlumberger Ltd. SLB 97% $46.42 $65.56 41% 2.37% MicroStrategy Inc. MSTR 100% $1,396.76 $1,959.82 40% 0.00% Delta Air Lines Inc. DAL 95% $43.62 $60.99 40% 1.38% Halliburton Co. HAL 86% $33.94 $46.92 38% 2.00%
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July 15, 2024 12:04 ET (16:04 GMT)
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