Why the disparity, you might ask?
Well, in order to understand why, you need to know a bit about what value investing is first.
What is value investing?
Firstly, ‘value’ isn’t a permanent character trait of a share — rather, it’s a situation. In order to be a value share, the stock must be trading below its intrinsic worth and, therefore, offer ‘value’ to the investor.
As you can read in our ‘Guide to value investing‘, the ASX shares that value investors seek look cheap compared to the underlying revenue and earnings of those businesses.
According to our guide:
Investors who use the value investing strategy hope that a company’s share price will rise as more people come to appreciate the true intrinsic value of the company’s fundamental business.
Shares in any industry can be value shares. But generally speaking, value investing does tend to centre around well-established blue-chip companies with “consistent profitability [and] stable revenue streams”.
Value investors want to buy the highest-quality ASX shares as cheaply as possible. Then they wait for the rest of the market to catch on and bid the share price up in order to achieve some profit.
What’s the first rule of value investing?
The first rule with buying ASX value shares is to buy low and sell high. Easy right? Well, no.
Buying low requires you to be able to identify when an ASX share is trading below what it is worth.
That’s why value investors spend a lot of time doing research. Their key goal is to understand the intrinsic value and a fair share price for each business they’re interested in.
Then, they wait for opportunity, which can come in many forms. One form is when general negative sentiment drags down the entire ASX 200. You see where I’m going with this, right?
Value investors are having a party right now
Today, there’s significant negative sentiment in the share market. People are worried about rising inflation and interest rates. They’re not just worried about the impact on their personal wallets. They’re also worried about how these macro-economic issues will impact the companies they are invested in.
When there’s fear in the market, people often sell. They lose confidence and they sell on emotion. Many just want their money out while the market is jumpy.
That means the highest quality companies get sold off with the rest of the market. Their share prices fall, and that’s when value investors pounce.
Whether it’s the right time for value investors to buy yet is a matter of opinion. But you can bet they’re at least actively watching the market right now!
Why ASX value shares aren’t falling as much
It’s this pouncing effect from value buyers that might be why ASX 200 value shares aren’t falling in price as much as ASX growth shares.
In general, ASX investors are feeling nervous right now. When people are fearful, they want to mitigate risk. And it’s the boring (but reliable) blue chips that can provide the certainty investors are craving.
And they sure look appealing at today’s prices.
Examples of ASX 200 value shares
S&P Global has categorised a bunch of ASX shares as value shares right now. Let’s test a few of them.
The top five constituents of the S&P/ASX 200 Value Index (by market capitalisation) are:
- National Australia Bank Ltd (ASX: NAB) — share price down 5.65% year to date
- BHP Group Ltd (ASX: BHP) — share price down 5.85% year to date
- Commonwealth Bank of Australia (ASX: CBA) — share price down 10.8% year to date
- Westpac Banking Corp (ASX: WBC) — share price down 9.2% year to date
- Australia and New Zealand Banking Group Ltd (ASX: ANZ) — share price down 20.4% year to date.
Who sees good value here?
Other reasons why ASX value shares aren’t falling as much
Remember, ASX value shares are generally well-established companies selling at a discount. They’re not young unproven companies yet to make a profit (like many ASX tech shares) selling at a discount.
This means that, by nature, value shares don’t exhibit the same share price volatility as growth shares.
It’s also probably fair to assume that there’s less selling activity on value shares compared to growth shares, too.
Long-term owners would be far less inclined to sell their highest-quality shares because of short-term headwinds like inflation.
Some long-term investors have held their blue chips through 9/11, the global financial crisis, and the pandemic. What’s a little inflation compared to these events?
The quintessential value investor: Warren Buffett
Famous investor Warren Buffett is one of the world’s most eminent value investors. He’s got two rules of investing, which go something like this: “The first rule of investing is don’t lose money, and the second rule is don’t forget the first rule.”
So, value investing suits him. He says: “If you buy things for far below what they’re worth and you buy a group of them, you basically don’t lose money.”
As my fellow Fool in the US, Keith Speights, reports, Buffett is already in the market buying up value stocks.
Click here to learn how to identify ASX value shares.