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After Big Market Declines, Value Does Best

by: Dan Knight January 23, 2008 | about stocks: IJJ / IJS / IVE / IWD / IWN / IWS    
Dan Knight

Dan Knight

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In this panic driven market environment, I did some research to what might happen after the plunge. I looked at big monthly market declines and how Value stocks, as defined as the lowest 20% of stocks ranked by Price to Book Value did relative to Growth stocks, the highest ranked 20% by P/B, and the market in general.

My "down and dirty" analysis was this - look at all months that the market fell by at least 5%, such as now. Then look at how the Value and Growth stocks performed over the next 6 months. Since 1974, there have been 28 months where the market fell by at least 5%. The market grew by an average of 7.9% the following 6 months after the decline. However, Value stocks averaged an 11% rise, a statistically significant excess return over the market. Growth rose about 7.4%, more or less inline with the general market.

This likely Value rebound after a big market decline should bode well for many of the Investment Directors at VesTopia, who emphasize valuation in their stock selection, as it does for my long/short strategy. The tough part is having the steely nerve to jump in and buy the cheapest stocks. Good luck mustering that nerve!

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This article has 2 comments:

  •  
    Jan 23 09:02 PM
    I have certain stocks that fall in the deep value area. I think there has to be a catalyst that will ignite an interest in them. My three are Ford, Time Warner, and Micron. I feel that all three are poised for a great 08.
    If Ford is taking production off line. Should help the supply and demand side. TWX is reporting with a new CEO in Feb. Has 5 units ready to explode. Micron is so leveraged to any tech growth at all. The slightest hint that global growth will continue should propel that up quickly. Any thoughts?
    Reply
  •  
    Jan 29 05:10 PM
    Both Ford and TWX look attractive, at least on various measures of valuation, expectations, and growth. My models rank them both as strong buys. Micron, however, looks less appealing, since its earnings-based valuation and earnings growth look poor - I would hold off on it. Of course, my strategy is built upon portfolio construction, owning many stocks with attractive characteristics, and less on individual stock selection. Sorry for the belated reply.
    Reply
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