Value investing is experiencing a resurgence as value stocks outperform growth stocks after several challenging years. Bill Smead, co-manager of the Smead Value Fund, has positioned his portfolio to capitalize on this shift, with the fund up 6.75% this year and outperforming 97% of similar funds over the past 15 years, according to Morningstar data.
The rotation from growth to value stocks has accelerated in recent months, with energy, industrials, and small-cap stocks attracting investor interest. This shift comes as skepticism grows around the massive spending on AI infrastructure and whether it will generate proportional returns.
Value Stocks Poised for Continued Outperformance
Smead believes the value investing trend will continue, citing extreme valuations in the broader market. According to the fund manager, the Warren Buffett Indicator—which measures total stock market capitalization to GDP—currently sits at an all-time high of 216%.
Additionally, market concentration has reached historic levels, creating conditions that could lead to poor returns for the S&P 500 over the next decade. Major financial institutions, including Goldman Sachs and Morgan Stanley, have issued similar warnings in recent years.
The investor warned that most investors hold too much exposure to the 70% of the S&P 500 that may underperform over the coming decade. He predicted a potential selling spiral where older investors move funds from growth stocks to bonds after a period of underperformance.
Three Value Stock Picks for Housing Market Recovery
Smead identified three companies he considers particularly attractive for value investors. The first two are homebuilders DR Horton and Lennar, which represent 4.9% and 3.82% of his fund’s holdings, respectively.
After a prolonged slowdown caused by high mortgage rates, the housing market appears ready to recover. Demographic trends support a potential boom, according to Smead, who noted there are more 20-40-year-olds than ever before, yet fewer homes owned by this age group.
However, the fund manager sees an interesting connection between growth stock valuations and housing demand. He expects prospective homebuyers to liquidate gains from tech and large-cap growth stocks to fund home purchases, further accelerating the rotation into value stocks.
Meanwhile, recent data shows money flowing out of large-cap growth stocks while mortgage rates have declined. This trend aligns with Smead’s thesis that investors will shift capital from overvalued sectors to undervalued opportunities.
The third stock Smead highlighted is U-Haul, the moving and storage company whose shares he described as very depressed. The firm stands to benefit from increased housing market activity as more people need moving and storage services.
Balance Sheet Strength Overlooked
In contrast to market pricing, Smead believes U-Haul’s balance sheet is significantly undervalued. According to the investor, the company’s entire market capitalization is represented by its storage units alone, meaning investors are essentially getting a $5 billion leasing business for free.
The convergence of demographic trends, elevated valuations in growth stocks, and improving housing market conditions could support value investing strategies in the months ahead. However, the exact timing and magnitude of any market rotation remains uncertain as investors continue to weigh economic conditions and sector-specific developments.
