Buffett Backs Great Rotation: 4 Value Stocks & ETFs To Buy

The Oracle (NYSE:ORCL) of Omaha recently reaffirmed his liking for the concept of great rotation — a shift to equities from bonds. Warren Buffett believes long-term investors should go for stocks over bonds as in most cases the former is likely to outperform the latter.

The arguments hold good in today’s environment. Treasury yields have been on an uptrend since the start of the year, thanks to inflationary pressures and prospects of rising bond supply to fund Donald Trump’s tax overhaul plan. This has pushed the benchmark bond yields to a four-year high (read: Short These Sector ETFs on Rising Rate Concerns ).

Buffett Said “as an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds , assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”

Buffett believes that investing in stable companies whose products are strong sales-generating are better long-term bets than a “Benjamin Graham school of value investing . Buffett doesn’t seek capital gains but ownership in quality companies that are able to generate earnings.

This leads us to believe that choosing a value investment is a great idea over the long term. Below we highlight three value ETFs and stocks that produced at least 50% returns in the last five years (as of Feb 26, 2018).

This is in stark contrast to iShares 20+ Year Treasury Bond (NASDAQ:TLT) ETF (V:TLT) that yields around 2.61% and generated about 3% in the last five years (as of Feb 26, 2018). Total bond market iShares Core US Aggregate Bond ETF (AX:AGG) , which yields about 2.40% annually, lost about 2.8% in the last five years (as of Feb 26, 2018).

ETF Picks

Below we highlight three value ETFs that generated more than 60% returns in the last five years.

Guggenheim S&P 500 Pure Value RPV – Up 69.9%

The fund holds about 114 stocks and charges 35 bps in fees. No stock accounts for more than 2.58% of the fund (read: Value ETFs & Stocks to Enrich Your Portfolio Amid Volatility ).

First Trust Large Cap Value AlphaDEX Fund FTA – Up 64.3%

The 188-stock fund has double-digit weights in Financials, Consumer Discretionary and Utilities. The fund charges 62 bps in fees.

PowerShares Russell Top 200 Pure Value Portfolio ETF PXLV – Up 61%

The 69-stock fund is heavy on Financials, followed by Utilities and Energy.

Stock Picks

Below we highlight three stocks that have a Zacks Rank #1 (Strong Buy) and a Value Score of A. These stocks generated solid returns over the last five-year frame (as of Feb 26, 2018).

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HCA Holdings, Inc. (NYSE:HCA) – Up 172.9%

This non-governmental hospital in the U.S. providing health care and related services belongs to a top-ranked industry (top 12%). It has a VGM Score of A.

United States Steel Corporation (NYSE:X) – Up 123.8%

This integrated steel producer too comes from a top-ranked Zacks industry (top 29%) and has a VGM Score of A.

Super Micro Computer Inc. (NASDAQ:SMCI) – Up 63.1%

It manufactures and sells energy-efficient, application optimized server solutions based on the x86 architecture. It belongs to a top-ranked industry (top 34%) and has a VGM Score of A.

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Written By: Zacks Investment Research