Value Stocks Are Also Putting Up Big Returns

Much of the stock market news and analysis is focused solely on the S&P 500 Index, which is dominated by technology at 28.1% of the index’s weighting.

Much has also been made of the index returning 8.5% year to date, which is astonishing given the plunge earlier this year and the continued impacts of COVID-19.

But the S&P isn’t telling the full story of the U.S. stock market. The unweighted S&P 500, which takes all 505 member stocks from 11 sectors on an equal basis, is still down 1.5% year to date.

S&P 500 & Unweighted S&P 500 Indexes Total Return — Source: Bloomberg Finance, L.P.

The argument for tech stocks is that they’re resilient to the impacts of COVID-19. It’s a compelling story, but it isn’t without some dark chapters. Take September’s big drop, for example.

The S&P dropped 9.6%, and the S&P Technology Index dropped 12.8%. While technology companies have a lot going for them, their stocks have gotten very, very expensive.

The S&P’s price to earnings ratio has soared to 26.6, which is precariously high.

S&P 500 Index Price to Earnings Ratio — Source: Bloomberg Finance, L.P.

And the S&P Information Technology’s price to earnings ratio is even more in the stratosphere at 33.5.

Now, stock markets are forward-looking, and Bloomberg-compiled expectations of technology stocks’ earnings for the first quarter of 2021 are for 10.5% growth, followed by further growth of 13.5% for the second quarter, versus the same quarters of 2020.

So, there’s some cover for the argument to buy. But they’re still expensive.

However, there’s a market sector inside the S&P 500 that’s still a value, and it has been quietly outperforming both the S&P 500 and, more impressively, the technology sector since Sept. 2 to date.

Utility Players

Utilities are some of the least exciting story stocks for the financial media. But these are the companies that keep the power flowing for all of the electronics, electric cars, data centers and cloud-computing operations that are the darlings of the media.

And utilities are now getting some more attention in the stock market.

S&P Utilities, S&P 500 & S&P Information Technology Indexes Total Return — Source: Bloomberg Finance, L.P.

Utility stocks inside the S&P have returned 6.9% from Sept. 2 to date compared to the price drops in the S&P of 3.6% and the Information Technology Index by 6.0%.

They are also a lot less pricey, carrying an average price to earnings ratio of 17.7.

S&P Utilities Price to Earnings Ratio — Source: Bloomberg Finance, L.P.

On a price to sales basis, utilities look far cheaper at only 2.9 times. And this theme of cheap gets even better on a price to intrinsic (book) value basis at only 2.3 times.

Moreover, when looking at market price volatility of utilities against the S&P 500, the dependable value stocks are currently running at only 16.0% on a trailing 30-day basis. The S&P 500 is running at 19.0% and 26.2% for the Information Technology Index.

Cheaper valuations and less volatility in a highly charged and unsettled general stock market make utilities all the more attractive.

Plus, this is all before I get to the dividend yield advantage that utilities have over both the S&P 500 and the S&P Information Technology stocks.

The S&P 500 has a trailing yield of 1.7%, and the S&P Information Technology Index has a yield of 1.1%. But the S&P Utilities Index has a yield of 3.2%. And there are even many utilities inside Profitable Investing that beat that yield.

And it’s not that you sacrifice great longer-term returns by having utilities inside your own portfolio.

One of my most recent additions to the Profitable Investing portfolio is doing exceedingly well. Xcel Energy (NASDAQ:XEL) has returned 51.2% since late 2018, which is way ahead of the S&P 500’s return of 33.7%. And that is one of many.

As you can see, value doesn’t mean a lack of performance. It just means that you can buy and own cheaper companies with more dependability, especially as we head through the U.S. elections, year-end turbulence and, oh yes, the COVID-19 mess.

On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.


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