Value Stock Funds Are Lacking Value

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

As I will show you, the term “value” has been grossly misapplied in recent years.

Proctor & Gamble (PG) is a conservative and highly regarded consumer staples company with a 180-year track record. It produces many globally admired consumer brands, some of which are shown below.

Does being a great company with financially conservative values make PG a value stock? Most large-cap-value stock funds hold a sizeable stake in PG. Based solely on their holdings, it is tempting to claim PG is a value stock.

PG trades at key valuation ratios (P/E, P/B, and P/S) greater than the S&P 500. PG’s annualized revenue and earnings growth rates are 3.7% and 4.3%, respectively, over the last five years. Over the same period, the S&P 500 Index has grown revenue and earnings at more than double PG’s rate.

Per the gurus of value, Benjamin Graham and David Dodd, a stock should have good prospects and low valuations ratios to be classified as value. They believed investors should buy stocks with undervalued assets and that those assets, in time, would appreciate to fair value.

PG has overvalued assets and weaker-than-market growth prospects. Why is PG considered a value stock by most investors and a top 10 holding in many value funds?

Whether or not PG is a value stock is irrelevant. What is relevant is whether “value investors” using value stock mutual funds and ETFs own what they think they are buying.