Reuters, New York City -While Wall Street becomes enthralled with artificial intelligence, some investors are looking for deals in more traditional sectors of the stock market.

Value equities have mainly lagged behind their growth-focused peers as a result of artificial intelligence. Value stocks are generally described as businesses that trade at a discount on criteria like book value or price-to-earnings.

Gains have recently quickened in a few value-heavy industries, such as materials and industrials. That, according to supporters, is a hint that the rally in the S&P 500 benchmark index is extending beyond a few tech and growth companies.

Research Affiliates’ chief investment officer of equities, Que Nguyen, stated that value stocks had a solid long-term investment case. “Many of these companies have already undergone the challenging process of restructuring their balance sheets and businesses, and they are still incredibly inexpensive.”

In 2024, the S&P 500 has increased by 7.7% and is now at a record high. The S&P 500 Growth Index has gained 11.6% so far this year, whereas the S&P 500 Value Index has only increased 3.3%. However, in recent weeks, a few value-heavy sectors have shown signs of rebirth.

The industrial sector of the S&P 500 saw a 7.1% increase last month, led by gains in Howmet Aerospace and General Electric (NYSE: GE). That period saw a 5.8% gain for the overall index.

Vulcan Materials (NYSE: VMC) and Ecolab (NYSE: ECL) led the 6.7% increase in the materials sector in February. Consumer discretionary, which includes recent high performers like Ralph Lauren (NYSE: RL) and Chipotle Mexican Grill, increased by almost 9%.

A primary attraction: value stocks exhibit a comparatively low price concerning the overall market. Energy is selling at a 12.2 multiple, and the healthcare sector is at 18.9 times forward earnings. These multiples are significantly lower than the 20.8 ahead earnings for the S&P 500, which saw a rebound increase the benchmark 42% from its October 2022 lows.

The head of global equities and deputy chief investment officer at Northern Trust (NASDAQ: NTRS) Asset Management, Michael Hunstad, feels that multiples have gotten too high for the S&P 500 and the so-called Magnificent Seven group of growth and technology stocks that have driven its advance. According to him, the roughly 20% decline in Tesla (NASDAQ: TSLA) this year shows how rapidly these stocks may turn south.

“We anticipate increased volatility for multiples, especially in the Mag 7,” Hunstad, who has been boosting his holdings in value-oriented industries like energy and healthcare, stated.

Because value firms’ cash flows are shorter-term and less dependent on borrowing costs than growth stocks’, Hunstad thinks value equities could withstand a protracted period of high interest rates better than growth names.

Although investors still anticipate a rate decrease from the Fed this year, they are less optimistic about the pace and extent of the cut, given that an unexpectedly robust economy might spark inflation again if monetary policy eases too soon.

Fed Chairman Jerome Powell’s congressional appearance next week may clarify the opinions of decision-makers. Also, investors are anticipating U.S. jobless data on Friday.

During the past ten years, when sharp increases in the stock prices of firms like Apple (NASDAQ: AAPL), Alphabet, the parent company of Google (NASDAQ: GOOGL), and Meta Platforms (NASDAQ: META) have driven markets upward, it has been risky to bet against growth stocks. Over the past ten years, the S&P 500 Value index has increased by approximately 110%, while the S&P 500 Growth index has increased by roughly 235%.

In specific ways, the general attitude towards value has decreased. For the upcoming year, growth companies are expected to beat value names, according to a net 13% of fund managers surveyed by BofA Global Research. This is the highest conviction level since May 2020.

However, other strategists contend that long-term productivity benefits from AI could lift all boats, helping growth shares and value equities alike.

The chief investment officer of Robotti & Company, Robert Robotti, predicts that value equities would benefit most from AI adoption in terms of increased efficiency, which will boost their margins and drive up valuations. As a result, he has raised his position in industrial and healthcare equities.

“The application of AI is going to be across the entire company, and that’s not limited to the guy selling the chip,” Robotti stated. “The one who purchases the chip and boosts his productivity will gain.”

Conclusion

Value investing is a tried and true approach that can offer compelling returns for diligent investors. In the fast-paced and often overhyped world of stock markets, the steadfast research and patience required for value investing can set you apart. Remember, the key to success is not just in identifying these companies but in understanding why the market has undervalued them and, crucially, having the patience to wait for their actual value to be recognized. Happy investing!