Going Deep In Search Of Value

The value factor is again vexing investors. In fits and starts, value stocks have shown signs of life this year, but here we are almost eight months into 2020 and the S&P 500 Value Index is down 11.34%.

What Happened: Disappointment doesn't even begin to describe that performance, but investors shouldn't be hasty in writing value's obituary. For the bold, the Roundhill Acquirers Deep Value ETF DEEP beckons.

DEEP, which was brought into the Roundhill stable earlier this year, tracks the Acquirers Deep Value Index. Though value is taking its lumps this year, DEEP's methodology coupled with some value/growth anomalies could pave the way for upside for this unique play on an old, once beloved investing style.

Why It's Important: Trading at just 9.5 times earnings, DEEP offers a mid-cap view with a median market value of $8.6 billion. That price-to-earnings ratio only scratches the surface of just how cheap value stocks are these days.

“Currently, cheap value stocks are lagging expensive stocks by the widest margin since 1951--56 percent. Cheap stocks have lagged behind expensive stocks by more than 20 percent four times since 1951--1960, 1980, 2000, and since 2015,” according to Roundhill research. “This is also the longest time cheap value stocks have lagged behind expensive stocks--6 years. In 1960 value lagged for 2 years and 3 months. In 1980, almost 3 years. In 2000, just 18 months.”

DEEP allocates 39% of its weight to financial services names, which is usually a top sector weight in many value ETFs. The fund augments some of that sensitivity to low interest rates with a combined 34.5% weight to industrial and technology stocks.

What's Next: Value has to play catch up and if it does, DEEP investors could be handsomely rewarded.

“On a rolling 3-year basis, cheap stocks beat expensive stocks most of the time--in 80 percent of rolling 3-year windows cheap stocks won,” notes Roundhill. “And until recently, value had never lagged far behind over 3 years. In 1960 it fell behind by 11 percent. In 1980 it fell behind by 24 percent. In 2000 it lagged by 13 percent. In 2015 it fell behind by 24 percent. Today, it lags by an astonishing 51 percent.”

Historical data confirm patience is a virtue with value stocks, but when that group tops growth, it usually does so by significant margins.

“In short, cheap stocks (as measured by Ken French's price-to-cash flow data series) have significantly beaten out expensive stocks. The catch is regularly lagging expensive stocks. Cheap stocks lag most of the time, but when they lead, they lead by a wider margin,” said Roundhill.