MW This investing strategy features value stocks doing well 'below the AI circus'

By Philip van Doorn

Rather than focusing on low multiples to earnings, value-stock selection should include quality factors supporting long-term growth, according to Warren Koontz of Jennison Associates

These are three of the top 10 holdings of the PGIM Jennison Value Fund, which Jennison Head of Equity Value Warren Koontz discussed during an interview with MarketWatch.

Monday's recovery of prices of technology stocks may have caused some sighs of relief, but the S&P 500 remains highly concentrated. This means that, if you have money in an S&P 500 index fund, you might have more money invested in a handful of stocks than you realize. There are many ways to diversify beyond the growth stocks dominating the index. One way is with a value approach, which might be appropriate for a portion of your portfolio.

Warren Koontz, the head of value equity at Jennison Associates, described his team's approach to selecting value stocks during an interview with MarketWatch. Based in New York, Jennison was founded in 1969 and is a subsidiary of Prudential Global Investment Management, which is the asset management arm of Prudential Financial Inc. $(PRU)$.

Jennison handles active management for equity portfolios for PGIM, according to Koontz. Jennison had about $220 billion in assets under management as of Sept. 30.

Koontz co-manages the PGIM Jennison Value Fund PEIZX and the PGIM Jennison Focused Value Fund PJGZX, both of which are rated four stars (out of five) within Morningstar's "Large Value" fund category.

These funds are benchmarked to the Russell 1000 Value Index RLV, which is made up of 870 stocks in the full Russell 1000 Index RUI of the largest publicly traded U.S. companies by market capitalization. Stocks in the Russell 1000 Value Index are those within the Russell 1000 with lower price-to-book ratios, lower two-year growth forecasts and lower five-year growth rates for sales per share. There is plenty of overlap between companies in the Russell 1000 Value Index and the Russell 1000 Growth Index RLG, which is made up of 391 companies. You can read more about how FTSE Russell analyzes companies' growth and value characteristics here.

Despite the overlap, the Russell 1000 Value and Growth indexes have had differentiated performance. For example, during 2022, the S&P 500 SPX declined 18.1%, with its information-technology sector down 28.2%. That year, the Russell 1000 was down 19.1% with the Russell 1000 Growth Index down 29.1%. But the Russell 1000 Value Index held up better, with a decline of 7.5%. These are all total returns with dividends reinvested.

The market has broadened out. A lot of things have done very well, just below the AI circus.Warren Koontz, head of value equity at Jennison Associates

Getting back to large-cap dominance, the SPDR S&P 500 ETF Trust SPY is 41% concentrated in 10 companies. According to data compiled by Ned Davis Research, the S&P 500's concentration of its 10 largest companies by market cap is at its highest level at least since 1972. Going back 10 years, the index's concentration in its largest 10 companies was 19.1%, according to the NDR data.

Selecting value stocks

Over the past five years through Monday, the S&P 500 returned 107.5%, while the Russell 1000 Growth Index returned 125.7% and the Russell 1000 Value Index returned 76.6% - all with dividends reinvested.

"Growth has outperformed value. But if you are worried about concentration focused so tightly on a small group of names, it is a great time to look at value managers," Koontz said, as this investing style covers a much larger set of companies than a large-cap growth style.

"There is a lot of innovation in the market that's being overlooked by investors," he said. "The market has broadened out. A lot of things have done very well, just below the AI circus."

Jennison's fundamental research on value stocks includes returns on invested capital, free cash flow to enterprise value, earnings surprises and price momentum.

"We are not so much concerned about multiples," Koontz said. "Intrinsic value is projecting earnings and cash flow out. The best companies we can buy are those that can keep growing intrinsic value over time."

Koontz stressed that Jennison's focus on intrinsic value and momentum could highlight compelling stocks ahead of the market or present opportunities to scoop up stocks at low prices during periods of stress.

"We use time-horizon arbitrage," he said. "We know the markets are short-term oriented." He explained that even if a company reports solid performance, its stock can slide quickly if its executives say something that surprises investors. "That's when we might buy," he said.

When asked for an example of a stock he purchased after this type of price pressure, Koontz cited Walmart Inc. $(WMT)$, which announced its agreement to acquire Jet.com on Aug. 8, 2016. The deal was completed on Sept. 19, 2016. From Aug. 8 through Oct. 13 of that year, Walmart's share price declined 7%. Koontz said that reaction might have resulted from investors' concern about Walmart's plan to build on the Jet.com acquisition through massive investments in its online-retail business. But he saw it as an opportunity to expand his Walmart position because the company "was doing the right thing longer term."

Koontz said that turnover "tends to be low" within the value portfolios managed by Jennison. "We have had companies in the portfolio for a decade and sometimes more."

Walmart was the second-largest holding of the PGIM Jennison Value Fund as of Sept. 30. This fund held 62 companies' stocks as of Sept. 30, while the PGIM Jennison Focused Value Fund held 35 stocks, also with Walmart as its second-largest holding.

Another holding that Koontz discussed as a long-term value play with excellent prospects was RTX Corp. $(RTX)$, because of two long-term-growth trends. He said that with tremendous backlogs for Boeing Co. $(BA)$ and Airbus SE $(EADSY)$ as airlines expand capacity, investors might be overlooking the concurrent demand for aircraft engines supplied by RTX subsidiaries.

The other long-term trend Koontz cited for RTX was increasing military spending. This includes the efforts by Western European companies to build up their armed forces and the U.S. government's need to replenish equipment used to support Ukraine and Israel.

When asked if RTX is really a value stock in light of its growth runway, Koontz said: "It is a growth stock but it is undervalued."

RTX is held by the PGIM Jennison Value Fund, but not by the Focused Value Fund.

Another stock Koontz mentioned, which is held by both PGIM Jennison value funds, is Alphabet Inc. $(GOOGL)$, which was added to the Russell 1000 Value Index in June.

This is one of the largest 10 components of the S&P 500, and others among that group held by the PGIM Jennison Value Fund include Microsoft Corp. $(MSFT)$, and Meta Platforms Inc. (META) But together, Alphabet, Microsoft and Meta made up 5.9% of the fund as of Sept. 30. In comparison, the three make up a combined 13.9% for the three companies within the SPY portfolio.

"The reason we got into it, somewhat recently, is everyone thought AI would kill search," Koontz said. The stock was lower when "Google was not vocal about their own capability" in the AI space, he said.

"Fast-forward a couple of months - they have wonderful capabilities. The Gemini large language model is quite good and competitive to ChatGPT," Koontz said. "They have caught up and the stock has caught up."

Let's look at a price chart for Alphabet's Class A shares:

Alphabet Inc.'s Class A shares were up 53% for 2025 through Nov. 10, but the stock had been down as much as 24% for the year through April 8.

Here are the largest 10 holdings of the PGIM Jennison Value Fund as of Sept. 30:

   Name                       Ticker  % of PGIM Jennison Value Fund portfolio 
   JPMorgan Chase & Co.      JPM                       5.14% 
   Walmart Inc.              WMT                       3.45% 
   Goldman Sachs Group Inc.  GS                        2.76% 
   NiSource Inc.             NI                        2.72% 
   Cisco Systems Inc.        CSCO                      2.40% 
   Williams Cos.             WMB                       2.36% 
   Bank of America Corp.     BAC                       2.25% 
   RTX Corp.                 RTX                       2.24% 
   Alphabet Inc. Class A     GOOGL                     2.11% 
   Exxon Mobil Corp.         XOM                       2.07% 
                                                               Source: FactSet 

Competing funds

The PGIM Jennison Value Fund and the PGIM Jennison Focused Value Fund were both launched in 1996. The funds' total returns have been close to those of the Russell 1000 Value Index over the past 10 years. But over the past five years, the funds have fared better. Here are five-year returns through Monday for the funds against the iShares Russell 1000 Value ETF IWD. Returns are net of fund expenses and include reinvested dividends and capital-gains distributions:

When asked why Jennison's value strategy had fared better in recent years against the benchmark, Koontz said: "We have not changed what we do," adding, "In a market where everyone is focused on AI, the difference being lost and why we have done so well, is that fundamentals have mattered."

Over the past five years, the PGIM Jennison Focused Value fund has outperformed the PGIM Jennison Value Fund. Both funds have multiple share classes. In this article we have focused on the Class Z shares, which have lower expenses than the funds' Class A shares.

For both funds, the Class Z shares are available with no sales charges across various brokerage platforms. Annual expenses for the PGIM Jennison Value Fund come to 0.60% of assets under management. That means $60 in annual fees for a $10,000 investment. For the Focused Value Fund, the expense ratio is 0.75%.

(MORE TO FOLLOW) Dow Jones Newswires

November 11, 2025 11:50 ET (16:50 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.