Just because a stock is considered a "value" doesn't mean it can't grow like crazy. In fact, many S&P 500 value stocks are expected to post massive profit growth for the just-ended quarter.
Ten stocks in the S&P 500 Pure Value index — including financials like American International Group and Assurant, consumer discretionary Ford Motor and Warren Buffett stock Berkshire Hathaway — are expected to post 24% or higher adjusted profit growth in the third quarter, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. The S&P 500 Pure Value index only contains stocks with low valuations.
Such powerful growth from "value" stocks underscores an important shift in the market: You don't have to pay up for growth stocks for a claim to fast-growing profit. In fact, the average stock in the S&P 500 Pure Growth index is expected to post a 3.5% drop in adjusted earnings per share in the third quarter.
Time For S&P 500 Value Stocks To Perk Up?
Investors have shunned value stocks for years now. But are they missing out on an unlikely source of profit growth?
The SPDR Portfolio S&P 500 Value ETF is up just 6.2% this year. That trails way behind the 17.1% gain by the SPDR Portfolio S&P 500 Growth ETF. It's also lagging the SPDR S&P 500 ETF Trust's 11.8% gain.
But the data shows the anomaly. Nearly 30 of the 77 stocks in the S&P 500 Pure Value index, or roughly 40%, are expected to post stronger quarterly earnings growth than the average stock in the S&P 500 Pure Growth index. And it's not just a value-vs.-growth debate. Profits in the entire S&P 500 are expected to fall 0.1% in the quarter, says John Butters of FactSet.
"If 0.1% is the actual decline for the quarter, it will mark the fourth straight quarter of (year-over-year) earnings declines reported by the index," Butters said. That's much less growth than you'll find with many value stocks.
Big Value S&P 500 Grower: Financials?
When most S&P 500 investors think of robust profit growth, tech stocks come to mind. But select financials are slated to put up the big numbers in the third quarter. All three of the S&P 500 Pure Value stocks expected to post the highest earnings growth in the third quarter are financials.
Analysts expect insurer AIG to earn an adjusted $1.54 a share in the third quarter. If that materializes, that would mark astounding growth of 133%, which is more than any other S&P 500 Pure Value company. With that said, shares of the company are down 4.3% this year so far. The question is: How much of an issue is it that the company's revenue is seen falling 13.5% during the period?
Going along with the theme, insurer Assurant is also seen putting up huge profit-growth numbers. Analysts think the company will make $2.09 a share in the third quarter. That's up more than 128% from the same period a year ago.
Warren Buffett owns a big piece of the insurance action, too. His Berkshire Hathaway, which has a very large insurance business, is expected to post more than 37% adjusted profit growth in the third quarter.
Other Sources Of Cheap Growth
A number of the stocks that investors loaded up on during the pandemic are starting to show the profits people expected.
Ford Motor, despite a raging strike, is expected to post 52% higher profit in the third quarter. Not bad for a value company. Meanwhile, airlines are finally delivering profits from revenge travel. Profit is seen rising 36% and 24.9%, respectively, at Delta Air Lines and United Airlines.
When value stocks are growing like this, why pay up for growth stocks that aren't growing as much?
Big Value Profit Growth
Highest third-quarter EPS estimates among S&P 500 Pure Value
| Company | Ticker | Q3 EPS growth est | Sector |
|---|---|---|---|
| American International | 133.8% | Financials | |
| Assurant | 128.6% | Financials | |
| MetLife | 72.5% | Financials | |
| Ford Motor | 52.4% | Consumer Discretionary | |
| Prudential Financial | 51.7% | Financials | |
| DaVita | 40.5% | Health Care | |
| Berkshire Hathaway | 37.6% | Financials | |
| Delta Air Lines | 36.0% | Industrials | |
| The Hartford Financial | 36.0% | Financials | |
| United Airlines | 24.9% | Industrials |
Sources: S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter @mattkrantz
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