IWD: Value Stocks Are Likely To Shine Amid Impressive Growth And Potential Rotation

seekingalpha07-29

The market trends are shifting, with the value category expected to outperform.IWD offers an attractive entry point with cheap valuations, strong growth trends, and potential rotation from growth to ...

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The value-focused ETF appears attractive because of improving broader macroeconomic trends, robust earnings growth rates, and significantly low valuations. The potential valuation burst risk in the growth category is also expected to increase investor rotation to a value category, a factor that can substantially boost IWD's price in the coming months. Therefore, I initiate coverage of IWD with a buy rating. Tech Stocks' Valuation Risk and Rotation to Value IWD, IWF, and S&P 500 price performance since July 10 (Seeking Alpha) After underperformance in the last eighteen months, the most recent data suggest value stocks and ETFs begin outperforming the broader market index and growth category. IWD's share price generated a price return of 5% since the broader selloff in the tech category triggered after July 10. iShares Russell 1000 Growth ETF (IWF) plunged 8% and the S&P 500 declined more than 3%. It appears that the broader market index is likely to witness a correction because the exceptional tech stocks' performance in the last one and a half year has significantly stretched their valuations to a level where it's challenging to sustain the momentum. S&P 500 and information technology sector forward PE (Seeking Alpha) iShares Russell 1000 Growth ETF is currently trading around 41x earnings, while the information technology sector crossed its early 2022 peak level. Forward valuations are also high. For example, the information technology sector is currently trading around 28x forward earnings while the magnificent seven at 31x, compared to the S&P 500's 21x. History shows that corrections occur frequently whenever valuations increase above the intrinsic value. I believe it's time for a price correction to match with the long-term valuations. Slowing growth and defusing AI hype are also likely to play a key role in bursting tech stocks' valuations. Besides NVIDIA and a few other companies, there is no real clarity on when AI revenues will appear on the tech companies' financial statements. Market pundits say it will take years for AI-related sales to appear on the profit-and-loss statements. So far, most of the software and other tech companies are integrating AI with their existing and new products to improve their performance. In fact, there are growing concerns that AI is eating the software industry. Therefore, I believe that the risk of a potential selloff in growth stocks is high. And, in the case of correction and rotation out of tech stocks, a big boost is expected for a value category, a glimpse of which we have seen in the past two weeks. Why Does IWD Look Attractive? IWD portfolio characteristics (iShares.com) It's true that value stocks have been trading at lower valuations over the decade due to investor concentration in growth stocks. However, the worth considering factor is how much value stocks are currently undervalued. The Russell 1000 Value ETF, which offers broader coverage of the value category with more than 800 holdings, is currently trading around 18.5x earnings and 2.5x book value, down substantially from the Russell 1000 Growth ETF's 41x and 13x, respectively. Furthermore, the IWD looks significantly undervalued based on forward valuations, thanks to robust earnings growth trends. It is currently trading around 16x forward earnings, compared to nearly 28x of the growth category. In addition to cheap valuations, the fundamentals of value stocks appear to be improving given declining inflation and increasing chances for the potential rate cut in September. Rates hikes and inflation have depressed their prices and financial performance in the past year because value companies are sensitive to monetary policy and inflation. IWD sector exposure (Seeking Alpha) Value stocks mainly belong to sectors like financials and healthcare. Industrials, consumer defensive, and energy sectors. All these sectors are expected to generate solid financial growth in the coming quarters due to slowing inflation and potential rate cuts. For example, the financial sector is likely to experience 15% earnings growth in 2024 according to FactSet data. Robust performance from banking giants in the second quarter along with an upbeat outlook also signal greater returns for shareholders. JPMorgan Chase (JPM) and Bank of America (BAC), the two largest stock holdings of IWD's portfolio, topped the second-quarter revenue expectations. Both banks raised their dividends and plans to return significant cash through share buybacks. In the Q2 earnings release, the Bank of America announced a $25B stock buyback program and lifted its dividend by 8% while JPMorgan Chase plans to increase its dividend for the second time in 2024. Shares of both banks have also been soaring at a solid pace, with JPMorgan up 34% and Bank of America soaring 28% in the last twelve months. IWD top 10 holdings (Seeking Alpha) The other top stock in IWD's portfolio from the financial sector is Warren Buffett's Berkshire Hathaway (BRK.B), which has a long history of strong performance. Berkshire's shares are up nearly 25% in the last twelve months. Besides financials, the healthcare sector is also expected to bounce back after poor share price and financial performance in the last year. FactSet data shows that the healthcare sector is poised to generate above 15% earnings growth in the following quarters, with the expectation that the sector will post nearly 20% earnings growth in the following year. The second quarter earnings of healthcare companies also reflect a robust growth trend. For example, UnitedHealth Group Incorporated (UNH) topped revenue and earnings expectations and affirmed its adjusted net earnings outlook of $27.50 to $28.00 per share, reflecting a year-over-year increase of above 10%. Industrial companies are also performing exceptionally so far in 2024, with the expectation for further acceleration as potential rate cuts will boost business activities. 3M's (MMM) stock price skyrocketed by 23% in a single day after it announced second-quarter results and raised its lower end of the full-year outlook. The company now expects adjusted earnings per share for the full year in the range of $7 to $7.30 compared to the previous guidance of $6.8 to $7.30. Similarly, General Electric's (GE) shares rallied nearly 90% in the last twelve months due to solid growth rates. After experiencing a double-digit profit, orders, and cash flow growth in the second quarter, it raised the full-year guidance to $3.95 to $4.20 from $3.80 to $4.05. Overall, the fundamentals of the value category appear robust, while low valuations and potential rotation out of tech stocks could boost price returns. Quant Rating IWD Quant Rating (Seeking Alpha) A significant change in IWD's quant rating occurred in the past months, which is in-line with what I have portrayed above. Grades on the three key factors, including momentum, risk, and dividend, improved significantly. Consequently, the value-focused ETF earned a buy rating, with a quant score of 3.87. Meanwhile, quant rating for growth ETFs declined compared to value ETFs. IWF earned a quant score of 3.67 due to lower grades on momentum and risk factors. I believe Quant score on value ETFs will improve in the coming days because of the potential extension of the upside trend while slowing growth, lofty valuations, and rotation could negatively impact tech ETFs' momentum. In Conclusion  Value-focused IWD appears attractive for investors seeking to time the market or hold a stake for a long term. This is because their cheap valuations offer an attractive entry point for new investors, while strong growth trends are likely to boost the price and dividend returns. Moreover, the potential correction in the growth category could increase investor rotation from growth stocks to low-beta value stocks, which is likely to accelerate demand. Therefore, initiating a position in IWD appears to be a prudent strategy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2455642026"}