There are plenty of arguments for why the bull market for U.S. stocks will continue in 2022. But investors’ focus appears to have shifted recently in favor of value stocks, rather than the growth stocks that have been propelling the broad indexes to record highs.
To be sure, we have seen many short periods over the relatively recent past where there has been a rotation to value, only to see the stock market revert to its growth focus.
But this time may be different.
One reason is that the Federal Reserve is expected to stop its extraordinary purchasing of U.S. Treasury bonds and mortgage-backed securities in the coming months. The Fed’s years of bond buying have held-down long-term interest rates, which in turn pushed investors seeking income to move money into the stock market.
In a rising-rate environment, money may flow out of the stock market, putting pressure on some of the highest-flying stocks that trade at high valuations.
Michael Brush expects the bull market to continue this year, but he also lists eight cheap stocks favored by various newsletters.
Below is a look at relative valuations for value and growth stocks along with a list of value stocks favored by analysts working for brokerage firms.
Value vs. growth
For starters, keep in mind that the broad stock indexes are weighted by market capitalization. That favors growth stocks. The five largest companies in the benchmark S&P 500 index SPX,
For the following valuation comparisons, we’re using the Russell 1000 index RUI,
FTSE Russell divides the Russell 1000 into two overlapping groups: The Russell 1000 Value Index RLV,
A look at exchange-traded funds that track the full Russell 1000 and its growth and value subsets shows that on a relative basis, value appears especially cheap:
| ETF | Ticker | Forward P/E | 20-year average forward P/E | Current valuation to 20-year average | Current valuation to full Russell 1000 | 20-year average valuation to full Russell 1000 |
| iShares Russell 1000 ETF | IWB, |
19.29 | 15.73 | 123% | ||
| iShares Russell 1000 Growth ETF | IWF, |
27.03 | 18.54 | 146% | 140% | 118% |
| iShares Russell 1000 Value ETF | IWD, |
14.58 | 13.72 | 106% | 76% | 87% |
| Source: FactSet | ||||||
All three groups are trading at forward price-to-earnings valuations above their 20-year averages, but the value group is doing so to a much smaller extent.
When looking at valuations for the growth and value groups relative to the full index, the growth group is trading much higher than the average, which is no surprise, while the value group is trading well below its 20-year average.
Screening the value stocks
We can pare the Russell 1000 Value Index by limiting the group to the 248 companies with forward price-to-earnings ratios below that of the index. Doing this also limits the groups to companies expected to be profitable over the next reported four-quarter period.
Among the 248 stocks, here are the 20 rated “buy” or equivalent among at least 75% of analysts polled by FactSet that are expected rise the most over the next year, based on consensus price targets:
| Company | Ticker | Forward P/E | Share “buy” ratings | Closing price – Jan. 4 | Consensus price target | Implied 12-month upside potential |
| Lithia Motors Inc. | LAD, |
8.1 | 86% | $297.91 | $469.92 | 58% |
| Jazz Pharmaceuticals Public Limited Co. | JAZZ, |
8.4 | 90% | $129.64 | $199.58 | 54% |
| Victoria’s Secret & Co. | VSCO, |
9.1 | 82% | $57.18 | $82.73 | 45% |
| EQT Corp. | EQT, |
9.6 | 75% | $22.41 | $31.57 | 41% |
| OneMain Holdings Inc. | OMF, |
5.8 | 88% | $52.27 | $72.73 | 39% |
| Vontier Corp | VNT, |
10.7 | 77% | $30.99 | $42.45 | 37% |
| Herbalife Nutrition Ltd. | HLF, |
10.0 | 100% | $41.85 | $57.25 | 37% |
| Darling Ingredients Inc. | DAR, |
13.2 | 100% | $71.04 | $96.79 | 36% |
| Ally Financial Inc. | ALLY, |
6.8 | 86% | $49.74 | $66.00 | 33% |
| Olin Corp. | OLN, |
6.0 | 83% | $56.21 | $73.87 | 31% |
| Equitable Holdings Inc. | EQH, |
5.6 | 92% | $34.45 | $45.00 | 31% |
| Gates Industrial Corp. PLC | GTES, |
12.6 | 75% | $16.70 | $21.67 | 30% |
| Boyd Gaming Corp. | BYD, |
13.2 | 82% | $64.99 | $83.80 | 29% |
| Western Alliance Bancorp | WAL, |
12.3 | 92% | $115.20 | $144.00 | 25% |
| Nexstar Media Group Inc. Class A | NXST, |
7.4 | 82% | $151.97 | $187.67 | 23% |
| Assurant Inc. | AIZ, |
14.3 | 100% | $157.74 | $194.67 | 23% |
| NCR Corp. | NCR, |
13.6 | 89% | $42.95 | $53.00 | 23% |
| Travel + Leisure Co. | TNL, |
13.7 | 80% | $58.60 | $72.20 | 23% |
| Synchrony Financial | SYF, |
8.1 | 77% | $48.16 | $58.74 | 22% |
| East West Bancorp Inc. | EWBC, |
13.5 | 92% | $82.20 | $100.18 | 22% |
| Source: FactSet | ||||||
You can click the tickers for more about each company.
Then read for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
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