Value stocks have under-performed growth stocks significantly since the 2008 financial crisis.
The Federal Reserve's rock-bottom interest rate policy, along with anemic economic growth, are factors that have favored growth names and hurt value.
For the past three and five years ended June 3, the Morningstar U.S. Growth Index has generated returns of 12.44% and 12.60%, respectively, compared with 8.87% and 10.65% for the Morningstar U.S. Value Index.
Growth has actually outdone value over the past two and half decades, beating value in 62% of calendar years since 1989, according to Standard & Poor's.
Over the past nine years, growth has beaten value in all but one year or 89% of the time.
All investors know that while trends can persist in the market longer than many expect, they don't last forever, and at some point value, which typically produces out-performance over growth over long periods of time, will start to show its strength. That pivot, or transition point, may have already begun.
So far this year, the Morningstar U.S. Value Index is up an impressive 7.03%, while the Morningstar U.S. Growth Index is up a mere 0.53%.
We have been on record since late last year saying that value stocks are set for a rebound, and so far this year that is proving correct. Value stocks, including financials, are being helped by the expectation of higher rates, which make growth stocks less attractive due to higher future discount rates, and attractive relative valuation comparisons to their more expensive growth counterparts.
As a result, investors should be tilting their portfolios more toward value.
Here are six solid stocks representing both value and growth -- but weighted toward value -- that can offer upside and that we think can position portfolios nicely for a sustained period of value stock out-performance.
First, here are four value stocks for the rebound in stocks that trade at below-market multiples.
1. AmTrust Financial Services (AFSI)
This insurance holding company through its subsidiaries provides a variety of insurance products to both small and middle-market businesses. The company has the markings of a strong value stock based on our Dreman investment model.
This strategy looks for price-earnings ratios at the bottom 20% of the market (below 12.04), and Amtrust meets this requirement with a ratio of 10.95. The company's return on equity of 18.55% exceeds the 16% benchmark in the model, and the ROE for each of the past 10 years exceeds the 10% requirement in our Warren E. Buffett value methodology.
The average expected return of 14.2% over the next 10 years also passes the Buffett litmus test.