Looking for a sign of how far the wipeout of S&P 500 growth stocks has gone? Consider this: Some growth stocks are now cheaper than value stocks.
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Eight stocks in the S&P 500 Pure Growth Index, like Qualcomm (QCOM) and Moderna (MRNA) sport forward price-to-earnings ratios that are less than the average of stocks in the S&P 500 Pure Value index, says an Investor’s Business Daily analysis of data from S&P 500 Global Market Intelligence and MarketSmith. It’s a twist that shows just how far value has rallied — while growth stalls.
“At the beginning of 2022, we noted that the value category was the most attractive and that both core and growth stocks were overvalued,” said Morningstar’s strategist Dave Sekera. But “the growth category is now the most undervalued, trading at a 19% discount to our fair value.”
Talk about a role reversal.
S&P 500 Value Overvalued?
The whole point of S&P 500 value stocks is that they tend to be cheaper than growth names. But the market this year is starting to twist the math.
The Invesco S&P 500 Pure Growth ETF (RPG) is down a crushing 20.6% this year. It’s getting hammered by epic falls by some of its formerly high-priced members like communications service firms like Netflix (NFLX) and Meta Platforms (FB). But here’s the interesting part. The Invesco S&P 500 Pure Value ETF (RPV) is up 5.4% this year. That more than 25 percentage points in extra performance is making a massive difference.
By Sekera’s calculation, growth stocks are now trading for a 19% discount. That’s even larger than the 8% discount in “cheap” value stocks. And that means some “growth” stocks in the S&P 500 are much cheaper than their typical growth-stock peers.
Looking At ‘Value-Priced’ Growth Stocks In The S&P 500
Take the example of tech giant Qualcomm. It’s a growth stock that trades like a value one.
The company is in the S&P 500 Pure Growth index. And its semiconductor designs find their way inside smartphones and smartwatches. But the stock is also value priced. Following a 22% drop this year, it trades for just 10.8 times what analysts think the company will make in the next 12 months. That’s much lower than the average forward P-E of 13.1 among the 115 stocks in the S&P 500 Pure Value index with forward P-Es.
But it’s not just technology stocks starting to see valuations sink into value territory. SVB Financial (SIVB), a well-run lender for high-tech startups, now trades for just 12.4 times expected earnings over the next 12 months. That’s even lower than its 16.5 times valuation based on earnings over the past 12 months. This stock trades more akin to technology stocks and is down 27.5% this year.
And here’s a surprise. Moderna, an innovator in vaccines, was an S&P 500 growth stock investors raced to own in 2021. But its shares have crumbled more than 40% this year. That means its valuation is just 6.3 times the company’s projected profit in the next 12 months. That makes it a cheap stock, even among cheap stocks.
Will growth stocks turn into value stocks in the S&P 500, and vice versa? Already a number of rallying energy stocks are considered S&P 500 Pure Growth index.
One thing’s clear, though, the rally in value is starting to make those stocks look much less “cheap” than they did.
Growth Stocks Cheaper Than Value?
S&P 500 Pure Growth stocks trading for less than the average forward P-E of S&P 500 Pure Value stocks
| Company | Symbol | YTD % ch. | Forward P-E* | Sector |
|---|---|---|---|---|
| SVB Financial | (SIVB) | -27.5% | 12.4 | Financials |
| Qualcomm | (QCOM) | -22.4 | 10.8 | Information Technology |
| Signature Bank | (SBNY) | -30.2 | 9.6 | Financials |
| Devon Energy | (DVN) | 77.0 | 8.8 | Energy |
| Goldman Sachs Group | (GS) | -16.0 | 8.3 | Financials |
| Discover Financial | (DFS) | -2.0 | 7.7 | Financials |
| Moderna | (MRNA) | -42.8 | 6.3 | Health Care |
| Diamondback Energy | (FANG) | 48.7 | 6.0 | Energy |
Sources: IBD, S&P Global Market Intelligence, *- to analysts’ 12 month price targets, mean P-E of S&P 500 Pure Value stocks is 13.1
Follow Matt Krantz on Twitter @mattkrantz
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