by James MacGregor, Cem Inal, and Richard Brink, AllianceBernstein
by James MacGregor, CFA, Chief Investment OfficerâUS Small and Mid Cap Value Equities; HeadâUS Value Equities, Cem Inal, Chief Investment OfficerâUS Large Cap Value Equities; Portfolio ManagerâGlobal Real Estate Securities, & Richard A. Brink, CFA, Market StrategistâClient Group, AllianceBernstein
Value has been in a protracted slump versus growth for years, but itâs been undergoing something of a makeover during that time.
Whether itâs Benjamin Graham and David Dodd or Eugene Fama and Kenneth French, you might excuse value investors for the occasional name drop, given the styleâs distinguished history. Stretching back to the times of the New Deal, investors have been actively scouring markets for fundamentally sound companies trading at a discount to their intrinsic value.
From a building-block lens, value was one of the original equity factors Fama and French isolated in the early 1990sâbased on characteristics that define sound businesses with upside potential and discounted valuations that have produced an attractive track record over time. If we extend the value factorâs history back to the late 1920âs using Fama French, it has outperformed growth by an annualized average of about 4.4%.
But value entered a protracted slump around the time of the Global Financial Crisis, with growth investingâs surge in popularity. For the better part of 15 years, value has been in a relative wilderness, with asset inflows largely relegated to an occasional passive play on the value factor. These episodes were often triggered by a macro developmentâwhether elections and policy uncertainty, inflation concerns or something else.
During this painful stretch, however, the value world was undergoing something of a transformation.
A Venerable Equity Style Undergoes a Makeover
For one thing, the composition of the value universe was evolving. Generally, value has mirrored the makeup of the US economy, which has historically been manufacturing-led. As the economy has transitioned to one driven much more by information and services, value indices have followed suit.
Today, value companies are often less about things like assets and price to book value. Increasingly, theyâre more about things like free cash flow, which knowledge-based and customer-service businesses will produceâand which we believe the market is misvaluing. So the nature of how portfolio managers and research analysts look at value itself has been evolving.
Of course, the value playbook still calls for exploiting investorsâ tendency to overreact to short-term events. Historically, that overreaction has focused more on troubled companies in macro-sensitive industries such as banks or energy or retail, which tend to slow when the economy slows. Today, investors are underreacting to the cash earnings power of value companies. In fact, value firmsâ earnings growth has been consistent with historical patterns, whereas investors are less willing to pay for these earnings today. As a result, value investors can access industry leaders that are growing earnings and market share with high profitability and long runways at attractive valuations.
Essentially, thereâs growth in value.
An Evolving Universe Tees Up Opportunities
In our view, these dynamics create opportunities across the company size spectrum.
In large-cap, there are well-known companies whose financial metrics or business models might be less understood by investors. Progressive, for example, is a well-known insurer but it has also been a bigâand earlyâadopter of tech to enhance operations and profitability. Many investors know Walmart, but perhaps not the magnitude of its structural advantage in the grocery business, including its ongoing adoption of tech in many aspects of its business.
In the small-cap arena are firms investors may not knowâsometimes with businesses investors donât know exist. Everyone knows that chips power the tech world, but chip manufacturing requires silicon wafers, and wafers need testing. Form Factor, a semiconductor test and measurement supplier, manufactures probe cards to enable that testing. Think of it as part of the AI supply chain.
Ryman Hospitality Properties may be known for its musical venues, but maybe not for its lodging business, which includes sprawling hotel/entertainment centersâa unique space within the lodging sector that requires specific expertise. A sizable share of the mid-cap market features firms that we believe control their own free-cash-flow destinies and arenât influenced by macro factors as much as segments such as energy and banking are.
Global Themes, Value Opportunities
Many company opportunities relate to broad global themesâonshoring and energy are two notable ones. As firms seek to de-risk supply chains by bringing links back onshore, this massive effort requires investment across the spectrum. This includes areas such as logistics, warehouses and inventory-management systems as well as factories and roadsânot to mention the technology to manage it all. Many companies that provide the needed building blocks for these supply-chain links live in the value universe. We think investors who can dissect these building blocks can find opportunity.
The same holds true for energy, as we see it. Whether by facilitating the creation of capacity to alleviate shortages of natural gas or enabling the building of new ports to accommodate shipping, many firms are working behind the scenes and positioned to benefit. The growing presence of data centers, in part to support AI, necessitates more power from utilities. And as renewable energy sources continue to expand, more facilities must be built and power grids upgraded. A host of companies play a role in making this happen.
To sum things up, investors eyeing the S&P 500 today might be anxious about valuations near all-time highs and returns driven by a handful of namesânotably the Magnificent Seven. On the other hand, the rest of the equity market offers what we call âmagnificent others.â Value seems to be a member of that club today, with its evolved company mix, solid growth potential and reasonable valuations. We think active investors who do the work can find plenty of growth in value.
About the Authors
James MacGregor was appointed Chief Investment Officer of US Small and Mid Cap Value Equities in 2009. In this role, he acts as the lead portfolio manager for ABâs US Small and Mid Cap Value strategies. MacGregor was appointed Head of US Value Equities in 2019, responsible for all US Value portfolios in the areas of business management and talent development. From 2009 to 2012, he also served as CIO of Canadian Value Equities. From 2004 to 2009, MacGregor was director of research for Small and Mid Cap Value Equities, overseeing coverage of companies for the Small Cap and Small/Mid Cap Value services. He started as a research analyst covering a wide number of sectors for those same services. Prior to joining the firm in 1998, MacGregor was a sell-side research analyst at Morgan Stanley, where he covered US packaging and Canadian paper stocks. He also serves as a board member and volunteer for Xavier Mission, a charitable organization that provides basic services and opportunities for empowerment and self-sufficiency to New Yorkers in need. MacGregor holds a BA in economics from McGill University, an MSc in economics from the London School of Economics and an MBA from the University of Chicago. He is a CFA charterholder. Location: New York
Cem Inal was appointed Chief Investment Officer of US Large Cap Value Equities in 2020, after serving as portfolio manager of US Large Cap Value Equities from 2016 until 2019. He has also served as Portfolio Manager of Global Real Estate Securities since 2023. Inal was previously a senior research analyst and leader of the technology sector. He also co-managed the International Small Cap Value service from its inception in 2014 until 2016. Before joining the firm in 2003 as a research analyst, Inal was a vice president at fusionOne, a communications software provider. Prior to that, he was an engagement manager at McKinsey & Company and a research engineer at Mitsubishi Electric. Inal holds a BSE in electrical engineering from Princeton University and an MBA in financial engineering from Cornell University. Location: New York
Richard A. Brink is a Senior Vice President and Market Strategist in the Client Group. Previously, he served as a managing director in the Alternatives and Multi-Asset Group. Prior to that role, Brink was a senior portfolio manager in Fixed Income, and before that an investment director for fixed-income investments within the Global Retail Investments Group. Before joining AB in 2004, he was senior product manager at the Dreyfus Corporation, covering both retail and institutional fixed-income offerings. Brink was previously a senior trainer, dealing primarily with the design and delivery of product training to financial advisors and mutual fund sales representatives. He holds a BS in applied mathematics and economics from Stony Brook University, and is a CFA charterholder. Location: New York
