A narrowly focused screen of value stocks highlights stocks trading cheaply to book value, sales and earnings, but which are also expected to increase sales per share rapidly
Investors often divide themselves into growth and value camps. Growth has been the big winner over recent years, led by Big Tech. Value strategies have trailed the S&P 500 (fueled by its heavy weighting to growth stocks) for years, but might still be compelling to investors.
Why consider value now? One reason is that the S&P 500 SPX is in a period of high concentration, with three companies – Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Nvidia Corp. (NVDA) – making up 19% of the $554 billion SPDR S&P 500 ETF Trust SPY.
The S&P 500 is weighted by market capitalization. This rewards success and can be lucrative in a long bull market. But Nvidia has shined a light on concentration risk with its stock dropping 11% over two trading sessions through Wednesday.
A recent study by MFS Investment Management of a century of price movement in the U.S. stock market shows that we are nearly 18 years into a period of increasing concentration. Following the last four concentration peaks, a cap-weighted stock portfolio would have underperformed other strategies, and a growth portfolio would have underperformed a value portfolio.
Another reason that it might be worth considering adding some exposure to value stocks is that these companies might benefit from declining borrowing costs as interest rates decline.
What is a value stock?
The S&P 500 Index is maintained by S&P Dow Jones Indices, which is a unit of S&P Global. The index is divided into value and growth subsets. The methodology for the S&P 500 Value Index XX:SP500PV is narrow the full S&P 500 to about two-thirds of the companies, based on combined scores for price-to-earnings ratios, price-to-book-value ratios and price-to-sales ratios.
The S&P 500 Growth Index VSPGX is made up of 230 stocks, screened for increases in revenue and earnings over the past three years, and for price momentum over the previous year when the indexes are reconstituted each December.
Both the S&P 500 Value and S&P 500 Growth indexes are weighted by market capitalization
With so many stocks in each of the S&P 500 Value and Growth indexes, there are scores of companies that are in both indexes.
S&P has provided this guide to its value index methodology, explaining how its three value-stock selection approaches work, and that the S&P 500 Value index has the lowest “relative value factor exposure.” This index is tracked by several exchange-traded funds, including iShares S&P 500 Value ETF IVE, the SPDR Portfolio S&P 500 Value ETF SPYV and the Vanguard S&P 500 Value ETF VOOV.
Here are S&P’s two narrower approaches to value-stock indexing within the S&P 500:
The S&P 500 Pure Value Index XX:SP500PV is made up of 95 stocks that are weighted by the index provider’s valuation scores. The number of stocks in this index will vary when it is reconstituted and rebalanced annually in December. This avoids cap-weighting and there is no overlap – these stocks aren’t also included in S&P’s growth index. S&P says this index has a medium level of exposure to its value factors. This index is tracked by the Invesco S&P 500 Pure Value ETF RPV.The S&P 500 Enhanced Value Index has the highest level of value factor exposure, according to S&P. It is made up of 100 stocks using a a modified weighting scheme, multiplying S&P’s value score for each company by its market capitalization. This index is reconstituted and rebalanced twice a year in June and December. It is tracked by the Invesco S&P 500 Enhanced Value ETF SPVU.
Screening the S&P 500 Enhanced Value Index
For 10 years through Wednesday, SPVU’s total return, including reinvested dividends, was 195.5%, while the return for RPV was 160.6%.
So we screened the components of the S&P 500 Enhanced Value Index to see which 10 companies were expected to show the highest compound annual growth rates (CAGR) for revenue per share from 2024 through 2026.
We used the per-share numbers rather than raw revenue numbers, to incorporate expected changes in share counts. If a company issues common shares to raise money, its common stockholders’ ownership positions are diluted, which means sales and earnings per share decline. If a company repurchases more stock than it issues, the share count declines and the per-share items increase.
For the expected CAGR, we used consensus estimates among analysts polled by FactSet, adjusted by the data provider if necessary for calendar years, because some companies’ fiscal years don’t match the calendar.
The index was last reconstituted in June, using trailing P/E and price-to-sales ratios at that time. We are showing current P/E based on Wednesday’s closing prices and earnings per share over the past 12 months, as calendarized by FactSet, as well as P/E based on consensus estimates for the following 12 months. We took the same approach to show two valuation ratios based on sales per share.
To put the expected sales-per-share CAGR into perspective for this group, the full S&P 500 is expected to grow sales per share at a weighted annualized pace of 5.7% from 2024 through 2026.
For valuation context, the forward P/E for the full S&P 500 is 20.9, while the forward P/E for the iShares S&P 500 Value ETF is 16.4.