Image Source: Pixabay

As investors sell off overvalued technology and growth stocks, they are piling into value stocks and exchange-traded funds (ETFs), according to Lipper data.

The investment data provider said U.S. value ETFs generated $1.8 billion in net inflows so far in March, according to Reuters.

At the same time, some $3.6 billion has flowed out of growth funds this month.

That should come as no surprise as growth stocks have been getting hammered in recent months. In addition to economic factors, growth stocks are generally way overvalued after two years of historically strong returns.

The S&P 500 Pure Growth index, which tracks large-cap growth stocks, is down 11.3% in March and 9.6% year-to-date. Conversely, the S&P 500 Pure Value index is down 4.2% so far in March and off just 1.5% YTD.

By comparison, the S&P 500 is down 7.3% in March and 6.1% YTD, so value stocks are outperforming the broader market. While value returns are still negative, investors are looking to cut their losses and see the performance gap for value stocks and ETFs increase over time.

Finding good values

Value stocks are identified in various different ways, using several different metrics, like price-to-earnings (P/E), price-to-book (P/B), and the longer term 5-year P/E-to-growth (PEG) ratio.

Historically, value stocks are those with P/E ratios below 10, and P/Bs and PEG ratios below 1. But that is not a hard and fast rule, because stocks with much higher ratios can be considered good value, depending on their histories and earnings power.

Generally, value stocks are those trading below their intrinsic values. So, the key is to look at a stock’s P/E over time. If it is trading well above its historical range, it is probably overvalued, meaning that the price is considerably higher than its typical or expected earnings power. That happens when there’s a lot of euphoria around a stock because of branding, hype, momentum, or irrational exuberance that sends the price surging higher than the fundamentals might dictate.

If the P/E ratio is at or below its historical range, it is probably undervalued. That means that it could have more upside as its price does not adequately reflect its earnings power or overall value.

Typically, value stocks are those of large, stable companies that tend to perform well in most market cycles, like those in financials, consumer staples, and perhaps industrials and utilities.

Stocks are historically overvalued

Even with this year’s selloff, U.S. stocks are historically overvalued. The S&P 500’s P/E ratio is about 25, which is the highest it has been since 1999 and the dotcom bubble. It is typically around 20, or lower.

The Shiller P/E ratio, which is based on inflation-adjusted earnings over the past 10 years, is about 35, down from 37 in the fourth quarter. Still, 35 is the highest since 2021 when it was 38. By the end of 2021, the tech bubble burst and a bear market in 2022 followed. Prior to 2021, the last time the Shiller P/E ratio was as high as it is now was in 1999 when it skyrocketed to over 40.

These numbers suggest that stocks are still overvalued, generally speaking, so investors should be looking for values.

More By This Author:

Gold Rush Sends Price To All-Time High — Can It Keep Surging?
DKS Just Raised Its Dividend By 10%
Tesla Stock Pops, But Is It A Blip Or Can The EV Maker Rally?