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Is David Einhorn Right that Value Investing is Dead?

  • (0:45) - Are Value Investors Getting Nervous?
  • (4:00) - Growth vs. Value: How Do They Compare?
  • (9:10) - Value Stock Screener
  • (10:45) - Tracey's Top Stock Picks
  • (16:00) - Episode Roundup:

Welcome to Episode #65 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

You might have seen the recent headlines about Greenlight Capital’s hedge fund manager David Einhorn’s latest investor letter.

Einhorn invests in value stocks and bets against the overvalued stocks. He’s a well-known figure in the value investing community.

His fund, however, has struggled in 2017 using this strategy.

Greenlight has retuned just 3.3% through September 2017 compared to the S&P 500’s return of 14.2% during the same period.

He writes that the persistent over performance by growth versus value leads to the question as to whether value investing is a “viable strategy.”

It hasn’t helped that his bets against those companies he considers overvalued, such as Amazon (AMZN) and Tesla (TSLA), haven’t worked out so far in 2017 either. Tesla is up 52% year-to-date while Amazon is up about 29%.

Is Einhorn right?

Is value investing all but dead?

Small Cap Value v. Small Cap Growth

Historically, small cap value stocks have been the best performing stocks.

But throughout 2017, growth has dominated. Taking a look at the iShares Russell 2000 growth and value ETFs:

1.      Small cap value: up 4.8% year-to-date

2.     Small cap growth: up 17% year-to-date

The 5-year returns aren’t much better for value investors with growth up 96% versus 71% for value.

Betting Against Growth in a Bull Market

One of the reasons for Einhorn’s under performance, however, is that he’s taking bets against some of the big tech names.

He’s not just buying value stocks. He’s actually betting against growth at the same time.

Judging when a bull market will end is difficult. They almost always go on far longer than you think. That seems to be the case right now with growth stocks.

Is There Still Value in the Market?

If you were a long-only value investor, things don’t look so bad. Leaving aside growth stocks, there are still value stocks out there to invest in.

Tracey has mentioned Micron (MU) many times on the Value Investor Podcast. It’s been a value stock all year long and is now up 84%, which isn’t too shabby.

She ran a screen to look for other value stocks with Zacks Ranks of #1 (Strong Buy) or #2 (Buy). This Rank should mean they have rising earnings estimates.

She also screened for all the classic value fundamentals including low P/E, PEG, P/B and P/S ratios.

This is a very narrow screen because it is looking for all the classic values instead of just one like P/E. It’s difficult to have ALL of the fundamentals.

And even with that narrowness, it returned 10 stocks.

3 Classic Value Stocks

1.      KB Home (KBH), one of the large home builders, has a PEG of 0.8 and a P/S ratio of 0.6. With the economy so strong, and low home inventories, its backlog keeps growing along with its average sales price.

2.     Magna International (MGA)is one of the largest auto parts suppliers in North America. Investors have been worried about peak auto so the stock is dirt cheap, with a forward P/E of 9.3 and a P/B ratio of only 1.9.

3.     Boot Barn (BOOT)is in the dreaded retail sector. Is all retail dead? Investors think so. They have fled this small cap maker of western boots and apparel. But it’s now trading with a forward P/E of 14.3 and has a P/S ratio of only 0.3. As an extra bonus, you can get shares for under $10 each.

What else should you know about value stocks in this growth stock era?

Find out on this week’s podcast.

Is 2017 a Repeat of the Nifty Fifty?

There have been other times in history where growth has dominated and everyone said value was dead.

If you want to learn about the Nifty Fifty era, which was in the late 1960s to early 1970s, when investors would pay as much as 50x earnings for a growth stock, check out the last Value Investor Podcast.

Tune into Value Investor Podcast #64:

More Stock News: This Is Bigger than the iPhone!

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Magna International, Inc. (MGA): Free Stock Analysis Report
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