Even the most exciting companies become boring eventually, though not always as suddenly as they have this year.
After steep U.S. market declines at the start of 2016 brought some once high-flying stocks down to earth, many familiar and formerly fast-growing companies now find themselves cheap enough to be targets of value fund managers.
Value funds – those which typically emphasize strong balance sheets, low share prices and steady dividends over revenue growth – are picking up companies including Apple, Gilead Sciences, Coach, and Whole Foods Market that a year ago were notching all-time highs and were widely held by growth-oriented funds.
Mutual fund managers say it is unusual for companies to transition from growth to value so rapidly, even if they suffer a slowdown in sales or share price drop. But several factors make the current period unusual: At lower share prices in an era of low interest rates, companies are prized by value fund managers because they offer dividends that outstrip the 10-year Treasury yield of 1.8% while also offering the chance for share price growth.
“Traditionally it was pretty easy to draw the line between growth and more income-oriented stocks,” said George Young, co-portfolio manager of the $438 million Villere Balanced Fund. “Now all of a sudden you see these companies that are more growth-oriented start to look attractive as income plays.”
Shares of Gilead Sciences, for instance, are down approximately 25% from their all-time high in June due to investor fear that sales growth may have peaked. Yet its dividend yield is up to 1.9%, a 35% increase from June, while funds such as the 21.6 billion T Rowe Value Fund have been buying shares.
Meanwhile, the $7 billion Goldman Sachs Mid-Cap Value fund picked up 1.3 million shares of Whole Foods and become its largest buyer among mutual funds over the last three months, according to Lipper data. At the same time, the $15.8 billion MainStay Large Cap Growth fund was its largest overall seller, shedding 3.6 million shares. Shares of Whole Foods are down 6.3% for the year to date.
Push Into Technology
The push for new value stocks comes at a time when traditionally value-oriented sectors like consumer staples stocks or utilities that pay high dividends have been bid up to record levels, pushing fund managers further afield in search of attractive buys.
Technology, led by Apple, has emerged as one of their new favorites, with value funds run by Fidelity, American Funds and Thornburg among the largest buyers of the company over the last six months. Overall, the average value fund now has 12.1% of its portfolio in technology companies, a jump of 22% from three years ago, according to Morningstar.
The T Rowe Value Fund, meanwhile, sold 8.5 million shares of General Electric – once a solid value stock before a corporate turnaround to focus on data analytics that has helped the company trade at a valuation double that of Facebook – and added shares of software company Juniper Networks.
Yet former growth companies that have experienced their ownership base changing over to more value-oriented owners could be in line for more shareholder-friendly demands such as increasing dividends or buybacks, said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
“A growth stock is much more likely to get a longer leash because its investors by nature are thinking ahead to what this company could become. Value fund managers by comparison are much more focused on the right now,” he said.