Value investing has always been about challenging the consensus—but never more so than today. After several tough years, we’re seeing signs of a value recovery brewing. Yet fresh approaches are needed to capture the potential in today’s complex markets.

It’s been tough to make the case for value investing. In some ways, the classic discipline, made famous by Benjamin Graham in the early 20th century, seems as sensible as ever: buy undervalued stocks that are misunderstood because emotional investors make mistakes, and stay the course until their true worth is realized. Yet because value stocks have underperformed growth stocks since the end of the global financial crisis, investors have lost faith.

The numbers are daunting. Over the last 10 years, the Russell 1000 Value Index has trailed the Russell 1000 Growth Index by 3.5% annualized. Value stocks are generally perceived as riskier and have suffered from a growing anxiety about trade frictions, interest-rate uncertainty, volatile oil prices and threats to economic growth. Beneath the surface, however, we see promising signals.

Deep Value Discount: Threat or Opportunity?

To survey the landscape, we looked at the discount of value stocks versus growth stocks using several metrics. Our research suggests that the Russell 1000 Value traded at a 42% discount to the Russell 1000 Growth at the end of 2018, based on price/forward earnings, price/sales and price/cash flow. In a historical perspective, that discount is exceptionally large, ranking at roughly the 20th percentile of all months over the past 20 years.

Skeptics might argue that the discount is justified. Sometimes, stocks are cheap because companies face real threats to their business and earnings potential. Perhaps value stocks are so much cheaper than growth stocks today because in a tougher macroeconomic environment, investors believe that growth stocks offer some immunity from a slowdown and value stocks are vulnerable.