Value stocks have started to show signs of life. Russ discusses why energy and financial stocks are currently the best ways to play the theme.

Value stocks are not surging, but they have at least begun to stir. Since the August lows, U.S. large cap value stocks have gained around 5.50%, in line with the overall market and a bit ahead of growth stocks.

Back at the end of August, I suggested that value was unfairly being left for dead, despite the fact that the style was looking cheap, perhaps cheaper than at any time since 2000. What value lacked was a catalyst, something that has recently emerged in the form of firmer data and resurrected tax cut talk. To the extent this continues, the next question is how to play the theme. Within the U.S. market, energy and financial stocks stand out.

On an absolute basis, financials, energy and utility stocks appear the cheapest based on the price-to-book (P/B) ratio. However, utilities, thanks to a steady stream of bond market refugees searching for yield, are not particularly cheap compared to their history. This leaves energy and financials. Energy in particular appears inexpensive relative to the broader market. Since 1995 the S&P 500 energy sector has traded at approximately a 17% discount to the broader market. Today that discount is nearly 40%. See the chart below.

S&P Energy Sector P/B vs. S&P 500

chart-energy-sector

The preponderance of value in these sectors is also evident in their respective weighting within value indexes. Banks and insurance companies make up around 26% of the S&P 500 Value Index, double their weighting in the S&P 500 Index. Similarly, the weighting of oil and gas in value indexes is approximately double the weight in the broader market.