Value Stocks Could Be Cheap for a Reason

Many investors are—sensibly—considering rebalancing their portfolios away from the large-cap tech and growth stocks that have driven market performance. The search is on for strategies that may potentially lead the next leg of a rally. Value stocks are one example, as they tend to trade at lower prices relative to their fundamentals. While value stocks are indeed less expensive, they may represent a “value trap”—cheap for a reason. As a group, the companies in the S&P 500 Dividend Aristocrats Index offer a compelling alternative of historically attractive valuation, higher quality—as measured by credit ratings, price/earnings (P/E) ratios and return on assets (ROA)—resiliency, better total return and higher historical dividend growth.

Definitions: Price/earnings (P/E) ratio shows how much investors are paying for a dollar of a company’s earnings. Return on assets (ROA) indicates how efficiently a company utilizes its assets, by determining how