For the past two weeks, TradeSmith has told us that value stocks have been underperforming growth stocks, but to keep an eye out for a possible change.
Remember, growth stocks are stocks that are anticipated to grow at a rate significantly above the market. Value stocks trade at a lower price relative to their fundamentals than growth stocks. These tend to be more mature companies that have been trading for a long time. Many of the value stocks pay dividends.
Ten days ago, we showed you this chart that shows the dramatic outperformance of growth stocks compared to value stocks over the past three years.
But this doesn’t mean that you should rush out and blindly sell your growth stocks or blindly buy every value stock. As always, we want to find the best stocks for our portfolios.
Today, we’ll show you how to find value stocks to consider for your portfolio.
Value stocks can especially be found in these sectors: basic materials, consumer staples, energy, financials, health care, industrials, real estate, and utilities.
They also tend to be lower-volatility stocks, and this is how we’ll find them using TradeStops.
Longtime readers of these educational articles know that I like to keep watch portfolios of the 10 Select Sector SPDR ETFs. By following these, I can see if the trends are changing inside the sectors. Here are the 10 ETFs.
(By the way, in another month, there will be a new sector added to this list. The communications service sector ETF ticker symbol will be XLC. It will take some stocks mostly from the information technology and consumer discretionary sectors to create this new sector. The stocks FB, GOOGL, GOOG, and NFLX will have a 49% weighting in the new sector. AAPL will remain in the technology sector and AMZN will remain in the discretionary sector.)
I also keep track of the top 10 holdings in each of these ETFs. To find the best value stocks from these, we’ll create two new watch portfolios. We’ll name the first portfolio “Sector ETF Stocks.” I’ll show you the second portfolio shortly.
Now we want to take the stocks from each of the individual sector portfolios and copy them into the new portfolio. This is really easy to do.
These are the top 10 holdings in XLB, the basic materials ETF. To move these into the new portfolio, click the box at the top to choose all the stocks, and then “Copy” the positions into the new portfolio.
Do this for all 10 sector portfolios, and the new Sector ETF Stocks portfolio will have 100 stocks. After that’s completed, create the second watch portfolio. We’ll call this portfolio “Low Risk Sector ETF Stocks.”
The next step is to find the value stocks in the first portfolio we created. Knowing that most value stocks have lower volatility, let’s use the Volatility Quotient (VQ) to sort and choose the stocks. In TradeStops, stocks with a VQ under 15% are considered low-risk stocks.
Now check the boxes of all the stocks with a VQ under 15% and copy those to the new “Low Risk Sector ETF Stocks” portfolio.
There are 41 stocks in the new portfolio. These are old-line, blue-chip stock names that you know quite well.
Now, sort these stocks according to the Stock State Indicator (SSI) status. Here’s where you’ll find a good number of value stocks that are worth considering for your portfolios. There are currently 20 of these stocks in the SSI Green Zone and 21 of these stocks in the SSI Red Zone.
Here’s an example of a value stock becoming a potentially good
Pfizer (PFE) is a stock I follow closely. PFE hit its SSI Stop signal in February at $33.02. It traded flat for the next three months before moving higher and triggering an SSI Entry signal on July 25 at $37.67. PFE closed Friday at $40.93 — that’s an almost 9% move higher in just a few weeks. And it went ex-dividend by 34 cents during the first week of August.
A well-diversified portfolio has a mix of both growth and value stocks. When the market tilts toward favoring value stocks, you’ll be ahead of the game by having your watch lists in place and waiting for the alerts to tell you they’re in a good position to buy.
Education and Research Specialist, TradeStops