Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about value investing with Caroline Edwards, senior investment director with Putnam Investments. We talked about what 2024 might bring, and we started by asking how value stocks have performed so far this year.

Caroline Edwards (CE): For the first half of the year, the market was really led by growth stocks, and you saw this real appetite for risk, and the appetite for any name that had artificial intelligence attached to it. And value stocks were really left behind during that period. Then, if you look through the third quarter, the third quarter was generally a little bit weak across all styles in the market, so you took a step back from that risk-on appetite. And then we saw a massive run in stocks. So we had these three separate times in the market. In the end, if we look at year to date, the benchmark that we look at, which is the Russell 1000 value, is up about 6%. It’s a good-enough market for us, but it’s not where you see a lot of those ‘growthier’ stocks that have performed much stronger than that.

Market conditions for value investors

CE: A surprising source of ongoing strength and value is the energy markets. We saw a lot of relative strength out of the energy stocks in 2022. And also, going into 2023, we’ve also seen some relative strength there. And then just the ongoing higher-than-normal interest rates generally works a little bit better for value stocks. We haven’t had some of those big moments that the growth market has had. But you’ve got some of those other underpinning efforts from strong energy markets, to higher-than-normal rates, that can keep the value space kind of interesting.

The strongest case for value in 2024

CE: I think the argument for value is really that we would not expect that this is going to be a run-away market for growth. There are a lot of variables in place that, in our minds, make us think that value will continue to be relevant. I also think that investors, prior to let’s say 2021 before value had had its come back, they would have said I’m never going to invest in value stocks again. Now we’ve had a two- to three-year reminder of why that balanced exposure is important in a portfolio. So I think that you’ve got a lot of variables in place that should keep value relevant. And also — let’s just kind of get back to the basics — value stocks are trading at between 14 and 15 times forward earnings. That’s a really attractive entry point. This is not expensive by any means. And so we’re finding plenty of stocks to buy, and that have good stories that we think have a lot of room to run.

Sectors she likes

CE: The big space for us in value is healthcare. It’s an area that, when you have all these drugs being now approved for weight loss — the GLP-1s — that has flipped healthcare on its head a little bit. So now the markets panic that no one’s going to be sick anymore, no one’s going to be overweight, you don’t need any more treatment. Extreme reactions like that present a nice opportunity for us on the value side. You also have the device and equipment manufacturers that have been kind of left behind, whether they had exposure to the biotech space that has been underperforming recently, or that the markets really concerned that Covid drove so much business for all these players. So the healthcare space has been one that’s been a little beat up. But [there are] a lot of sound fundamental stories there that could be really interesting going forward. And then, completely differently, the energy space is one where it’s hard to start to talk about that being an interesting opportunity over the last couple of years. But if you look at some of these big merger and acquisition activities that have happened, it really presents some interesting opportunities.

And finally what’s the bottom line on value investing in the current environment

CE: I think value investing is relevant in the current market environment. I think it’s very important to not get caught up in the euphoria of the moment — whether that euphoria might be AI stocks or anything related to the Fed pausing on its rate hikes. That’s not where value tends to be strong. 2022 was a great time for value. And I think after what we’ve lived through the past couple of years, this is definitely a return. You hear a lot of caution in the market about U.S. equities are overvalued. When you put your value hat on and you dissect the markets and dissect where those returns have come from, value has been a little bit left behind. And I think there’s a lot of inexpensive opportunities here to invest in. So we’re constructive on our space going forward. And again, we think we’re still looking at a little bit more of a new normal here where value is going to be relevant.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Caroline Edwards of Putnam Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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