November was another winning month for the stock market: Despite some occasional choppiness, the S&P 500 (SPX) gained another 5.7% last month in its best performance this year – boosting its year-to-date gain to 26.5%.
And the 2024 market rally continues to be lead higher largely by the “Magnificent 7” mega-cap stocks, just as it was last year… and with the same wide performance gaps.
In fact, if you exclude the 148% gain posted by the Mag 7 since the start of 2023, the other 493 stocks in the S&P 500 are only up 35% over the same time frame.
Now, that is still well above average for any random two-year period, historically speaking. But it pales in comparison to the performance of those seven mega-cap growth stocks.
But the times may be changing as 2025 fast approaches: Value stocks are flashing a relative buy signal that tells me value may soon steal the spotlight away from growth…
Plus, value stocks typically shine during the market’s year-end rally period, and they keep that momentum going into the New Year. Over the past 80 years in fact, value stocks beat growth in price performance by more than 3-to-1 during this period!
So, let’s dive into the details – and find out why you may want to start favoring value stocks…
Value Flashes a Strength Signal
Let’s face the facts: Value stocks have gotten quite… under-valued, ever since growth names began outperforming early last year. And with growth stocks taking the lead and running to higher prices, that means that value stocks are a relative bargain when compared to their more expensive growth counterparts.
But the market tends to favor either value or growth stocks in cycles – and that favor is turning back towards growth.
We can track the market’s shifting interests with a simple relative strength strategy, alternating between the Russell 1000 Value and Growth Indexes. That strategy recently flashed a new buy signal for value stocks, as you can see below:
The blue line at the bottom of the chart above tracks the relative strength ratio between the iShares Russell 1000 Growth ETF (IWF) and the iShares Russell 1000 Value ETF (IWD). As this ratio climbs to the higher end of the range, it suggests that growth names are outperforming value – and at the lower end, it suggests that value is taking the lead instead.
When this ratio gives readings at the top (around 97) or bottom (around 6) of its range, you can take the readings as buy signals for growth and value stocks, respectively – as shown by the red and green arrows. And as the green circle above shows, this ratio is currently sitting right at the bottom of the range. That’s a good sign for value over the next few months.
And as you can see in the top panel below, value stocks are trading at an extreme discount when compared to growth stocks, based on forward price/earnings (P/E) ratios:
Plus, as shown in the bottom panel, value stocks are also historically cheaper compared to growth on a price-to-sales basis as well.
This tells me that value stocks are now poised to take the lead from their growth counterparts and take on the market leadership role as we close out 2024.
And when these relative trends shift, with the market favoring one style over the other, the trend often persists for a while. That suggests 2025 could be a great year for investing in value stocks.
With that in mind, I’ve put together a simple TradeSmith screener based on our proven Value Strategy to find value stocks with high upside potential ahead of this market shift.
A Screener for High-Quality Value Stocks
Value stocks tend to trade at a lower price relative to their fundamentals – factors including dividends, earnings, and sales – making them more appealing to investors with longer time horizons. But even when looking for returns in the longer-term, not all value stocks are created equal. That’s where our Value Strategy comes in.
TradeSmith’s Value Strategy leverages our proprietary algorithms to scan the market for high-quality value stocks, to give you the best chance of success.
For a value stock to qualify for this strategy, the following fundamental requirements apply…
- Earnings per share (EPS) ratios must be positive…
- Sales must be positive…
- And book value-to-price ratios should be low.
But that’s not all; our Value Strategy takes the stocks that meet these requirements, then filters out unhealthy stocks based on the rankings of our Health Indicator.
Our unique Health Indicator system has three levels, or Zones: Green (healthy), Yellow (correcting), and Red (stopped out). For this strategy, we screen out any stocks not in the Health Indicator Green Zone.
Next, we screen out high-volatility stocks based on our established Volatility Quotient (VQ) algorithm.
Stocks with lower VQ values are considered lower risk. And to qualify for our TradeSmith Value Strategy, stocks must have an average VQ value under 40%. Anything above that level is considered higher risk.
Finally, to make the top cut for our Value Strategy, stocks can’t be trading at a loss since they last entered the Health Indicator Green Zone.
Those are just the basic requirements to qualify for our TradeSmith Value Strategy – but with our powerful Screener tool, you can go even further to find the perfect opportunities for your portfolio. I added a few additional filters you may want to consider, as shown below:
On top of our Value Strategy, I added filters for our exclusive Business Quality Score (BQS) and set it to only show stocks scored more than 75. That screens out all but the top 25% of stocks we rate for quality.
And I also insist on any stock I consider investing in to be Free Cash Flow positive (more than $0), because what’s reported as earnings per share can sometimes be manipulated.
When I ran this screener yesterday, I got 58 results. Due to space limitations, here are the top 15 of these results below, ranked by BQS:
Mike Burnick’s Bottom Line: Value stocks have taken a back seat to growth in recent years, but now I’m seeing indicators that point to value taking the lead again.
This simple TradeSmith screener can help you quickly find stocks with solid fundamentals that are available at bargain prices. When investors eventually realize just how undervalued these stocks are, it could lead to a big jump in the stock’s price – in a short period of time.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
P.S. Value stocks are flashing a buy signal now, but it may take a few months for the market shift to play out.
While you consider positioning your portfolio to focus on value in the longer-term, don’t forget to look for opportunities in the short term, too. Sitting on your hands can cause you to miss your chance for a quick profit… and sometimes, those quick profits can make a big difference.
And when it comes to short-term trades, there’s one name I’ve been keeping an eye on: Jonathan Rose, lead analyst at our corporate partner Masters in Trading. I’m a big fan of his work, and I’ve been happy to talk with him in front of the TradeSmith audience.
Jonathan spent 25 years developing his skills on the Chicago trading floors and inside private investment firms, and he’s used that experience to develop a strategy to excel with short-term options – finding success in trades lasting just a couple of days… or even a couple of hours.
Last week, Jonathan shared his latest research and tools at the One-Day Winners Summit, a live event debuting his new Zero-Day Options strategy, which takes advantage of zero-day-to-expiration (0DTE) options to play the market in any environment, bullish or bearish.
If you missed it, you’ve still got a chance to learn from Jonathan… but you’ll need to act fast. He’s recorded the live event, but it won’t be publicly available for much longer.
If you’d like to find out more about how short-dated options can deliver big profits in little time – and how you can benefit from Jonathan’s latest tools and his supportive community – you can CLICK HERE to watch a replay of the event.
Whether you’re looking to build profits in the short-term or trying to hedge against risks to your long-term portfolio, taking advantage of these ultra short-term options can add a powerful strategy to your trading toolbelt. Don’t miss it!