Where Have All the Value Stocks Gone?

(page 2 of 2)

Now that the easy money has been made, it's tougher for value managers to find underpriced gems. "There aren't a lot of opportunities that are screaming buys right now," says Ryan Leggio, a fund analyst at Morningstar (MORN).

Post-Rally Blues

After the rally, value investors are getting worried that their portfolio holdings no longer look like value plays. Dave Stepherson, a portfolio manager at Hardesty Capital Management, worries that might be the case for the technology stocks he owns. "Those stocks have done very well, and valuations are a little on the high side," Stepherson says.

But look elsewhere, value investors say, and there are still deals out there. The last seven months have rewarded low-quality companies that at one point looked endangered by the recession. However, many higher-quality names have languished.

"We're finding value in things that have not performed well because they're supersafe," Buckingham says. He is buying pharmaceutical companies and utilities, or a discount retailer such as Wal-Mart (WMT), which has seen its stock barely budge in the last seven months.

"The market has not paid for quality," Hawkins says. "It has really missed higher-quality [firms, generating] sustainable cash flow. We still think there is an opportunity to buy quality at a reasonable price."

Charlie Smith, chief investment officer at Fort Pitt Capital Group, owns AT&T (T) and Verizon (VZ), telecom firms that have lagged the broader market by a mile despite solid results. Even amid recession, "these are businesses that continue to grow," Smith says.

Bargains Remain

The stock market may look expensive compared with March, says Hardesty's Stepherson, but many stocks still look cheap compared with fundamental measures. "Even after the big moves, they're still trading at near-historic lows on valuation," he says. He owns Comcast (CMCSA), saying it is cheap relative to its cash flow, and also Target (TGT), arguing its price-to-sales ratio is ridiculously low.

Despite the runup in stock prices, value managers haven't made big shifts in their portfolio holdings, Natale says. Many managers seem to expect 2010 corporate results to soon provide justification for stocks' recent rally. Stocks still aren't pricing in the "normal rate of earnings growth" one would expect after a recession, Smith says.

These days, one of the biggest challenges for value managers is their reliance on fundamental measures such as earnings. These are uncertain times. After two years of financial crisis and recession, calculating a company's future earnings power has gotten very difficult.

Adding to value investors' heartburn is a volatile market driven more by investors' moods or broad economic trends than by individual company results.

Value investors like to think they possess patience and a long-term perspective. They might wish to add strong nerves to that list.

Steverman is a reporter for BusinessWeek's Investing channel.

Business Exchange

Track and share business topics across the Web.