Where Have All the Value Stocks Gone?

The market's big runup has made it difficult for value investors to ply their trade. Here's where they are looking now

By Ben Steverman

The great stock market fire sale of 2009 is over. The broad Standard & Poor's 500-stock index has jumped 58% since March, and it's common to find stocks that have doubled or tripled in price since those panicky days.

If they had the courage to buy when everyone else was selling, value investors have done well. But now what?

Those committed to the value style of investing—made famous by value guru Benjamin Graham and Berkshire Hathaway's (BRKA) Warren Buffett—are scrambling to find stocks that could still be called cheap.

It's not easy. "It's harder now to find things that meet our valuation parameters," says Mark Travis, chief executive of Intrepid Capital Management.

A Different Market

"There are not as many bargains as there were in the past," says John Buckingham, chief investment officer at Al Frank Asset Management. In March, you could have thrown darts at stock listings and found firms that were trading at deep discounts, he says.

Value equity managers try to buy and sell stocks based on intrinsic measures, such as earnings or cash flow, that they believe reflect what a company is really worth. They're likely to ignore temporary buy-or-sell signals, like economic trends or market fads, and make long-term bets that can take years to pay off.

"If you buy companies that are selling for less than they're worth, we think over time you get rewarded for that," says Brett Hawkins, a portfolio manager at Thompson, Siegel & Walmsley.

The surprise of the last seven months is how quickly value managers' once-unfashionable investments have paid off. Buckingham, for example, bought shares of car dealership firm Lithia Motors (LAD). Though the auto industry has struggled, Lithia shares now trade at five times their price in April. Value managers found lucrative bargains in similarly unpopular industries, such as banking and insurance.

Unpopular Sectors

Some of the most successful value investors this year have been those who were flexible about where they found undervalued stocks. In normal times, technology stocks, the favorites of growth managers, are seen as too expensive by value managers. But many value investors snapped them up in early 2009 when tech stocks plunged along with the rest of the market.

Mutual fund managers with this approach did very well, says Anthony Natale, who follows value managers for Morgan Stanley Smith Barney.

(Not all value managers have excelled, however. Those who focus on dividends have struggled, Natale says, as many firms slashed their dividend payouts.)

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