When investment pros talk about value stocks, they usually mean undervalued equities based on metrics like price-to-earnings or price-to-sales.
The PE ratio may be low compared to the company’s history, its competitors, or the market as a whole.
In recent years, the picture has been pretty bleak for value stocks, using Vanguard exchange-traded funds as proxies.
For instance, the Vanguard Value ETF (VTV) has generated an annualized return of 10.4% over the past 10 years. That pales in comparison to 15.2% for Vanguard Growth ETF (VUG) and 13% for the Vanguard S&P 500 ETF (VOO) .
Huge technology growth stocks like Alphabet, Apple, Meta Platforms, Microsoft, and Nvidia have ruled the roost, leaving value stocks behind.
Over longer periods, though, value outperformed growth by 4.4 percentage points from 1927 to 2022, according to Dimensional Fund Advisors.
GMO isn't your run-of-the-mill value investor
Renowned money manager GMO ($66 billion of assets under management) believes in value stocks. “Deep value stocks are currently our highest conviction long-only investment idea,” they wrote in a commentary.
However, GMO defines value a bit differently than some other investment pros. “When we talk about ‘deep value,’ we simply mean stocks that are cheap, often screamingly so, relative to our appraisal of their fair value,” it said.
So, the GMO managers don’t really care whether index providers designate stocks as growth or value (growth is commonly defined as companies whose earnings expand fast and far).
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“Although a low price-to-earnings or other valuation multiple can certainly correlate with cheapness, such characteristics aren’t always present,” GMO said.
“Some low PE stocks are worth even less than their prices, while some high PE stocks warrant even bigger premiums.”
GMO fund managers look for the cheapest 20% of stocks compared to their fundamental worth, as defined by analysts. It seeks quality stocks with strong potential growth while avoiding “deceptively cheap junky cyclical horrors and value traps.”
GMO says it's a good time to snag value stocks
GMO believes the present market environment is fruitful for its investing technique.
“In a world where many stocks are being driven ever higher by positive sentiment, many of the ones that have been most unloved are trading at extraordinary discounts,” it said.
You can’t expect big returns right away in all these stocks. You must wait for “investor sentiment to unwind and valuations to reassert themselves,” GMO managers said.
GMO’s investment returns prove that its strategy works, they said. Its U.S. Opportunistic Value Strategy returned 26.1% annualized from May 31, 2023, to July 31, 2024.
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That beat the MSCI USA Value Index by 2.6 percentage points but trailed the overall MSCI USA Index by 2.9 percentage points.
GMO explained those numbers. “In an environment where a handful of explosive growth stocks drove the broad market, the strategy was never realistically going to keep up [with the broad index],” it said.
“However, it was heartening to beat the MSCI USA Value Index so decisively.”
Are Alphabet and Meta value stocks?
You might think that a value strategy would exclude mega-cap tech stocks, but think again.
Take Alphabet (GOOGL) and Meta (META) , for example, which most investment experts consider growth stocks.
“They are exactly the kind of bargains that we are looking to include in our deep value cohort, and, indeed, they made a tremendous positive impact over the last 12 months,” GMO said.
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Alphabet's stock price has climbed 28% over the last 12 months, and Meta soared 80%.
Yet their earnings have also grown, and analysts' future earnings estimates have increased, making its forward PE ratios seem more attractive than you might think.
For instance, Alphabet's forward PE ratio is 19.2 using 2025 estimates, according to Nasdaq.com. Its 5-year PE range is 16.6 to 38, and its average PE over that period is 26.7, according to YCharts.
Meta Platforms' forward PE ratio is 21.9 based on 2025 estimates, according to Nasdaq.com. Its 5-year PE range is 8.5 to 38, and its median PE over that time frame is 27.1.
For perspective, the S&P 500's forward PE ratio is 22.4.
GMO's U.S. Opportunistic Value Fund lists both stocks as top holdings. Alphabet is the $552 million fund's 5th biggest holding, representing 3.6% of its portfolio. Meta Platforms shares account for 3.8% of the portfolio, tying it for the fund's third-biggest holding.
“Both Alphabet and Meta are highly profitable companies that score strongly on our quality metrics and yet trade at a significantly lower forward PE ratio than the broad market,” GMO said.
This reaffirms its philosophy. “That is why our strategy will continue to focus on valuation and fundamentals when deciding if a stock is cheap and not be swayed by artificial labels.”
The author owns shares of Alphabet and Meta Platforms.
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