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Through the first quarter of 2025, investors were coming to grips with the adverse consequences of rising tariffs. The S&P 500 Index fell 4.3% during the first quarter and the S&P 500 Equal Weighted index fell just 1.1%, reflecting broader participation in the market this quarter. Investors and the general public alike found themselves wrestling with the uncertainty that arose from the current administration’s intent on implementing higher tariffs on imported goods from most trading partners, which weighed heavily upon investors. To that end, we at Ñî¹óåú´«Ã½ decided to research one particular segment of the investment community, deep value investors, to see where they were looking for best opportunities. In combing through the portfolios of close to 95 investors who classify their investment strategy as Deep Value, we searched for sectors that had the greatest difference between the number of firms that bought than sold. This analysis found these investors were net most bullish on Health Services and Communications sector stocks, while the largest net number of investors were most aggressively reducing exposure to Producer Manufacturing and Technology Services.

Health Services

To understand what drove the attraction to the Health Services sector, we analyzed the largest buyers of this sector, which proved to be Dodge & Cox, Davis Selected Advisers LP and Barrow, Hanley, Mewhinney & Strauss LLC. Across all three investors was one common stock purchase – CVS. The fund having the greatest impact on Dodge & Cox’s Health Service investment trend was the Dodge & Cox Stock Fund, led by David Hoeft. In the fund’s first quarter investment commentary, the investment team commented, “In 2024, the Health Care sector faced significant challenges due to margin pressures and concerns about the potential for adverse regulatory changes. After being 2024’s largest detractor, Health Care was the top-contributing sector to the Fund’s relative performance during the first quarter of 2025. Our activity in the shares of CVS Health is an example of our contrarian, long-term approach. CVS has rebounded strongly after weak 2024 performance, up over 50% in the first quarter. 2024 was a difficult year for CVS due to weaker sales at its pharmacies and higher medical costs in its Medicare Advantage health insurance segment. The company’s results rebounded in the fourth quarter under new CEO David Joyner, who joined in October. The strong results fueled investor hopes for a turnaround. Consistent with our contrarian approach, we added to CVS during 2024 and early 2025 to take advantage of the company’s depressed valuation and our positive long-term outlook for the company.”

Another stock that was fancied by these same investors was Cigna. Davis Selected Advisers’ Davis NY Venture Fund managers Chris Davis and Danton Goei recently commented, “…our investments in this important sector [healthcare] have focused on those companies that play a part in moderating or reducing the natural rate of increase in healthcare spending. Companies such as Cigna and Humana, for example, offer programs like Medicare Advantage which deliver patients a higher quality of care at a lower cost.”

Communications Sector

The Communications sector saw the second largest net number of buyers over sellers but recorded the smallest capital inflows of all the sectors with positive net inflows. Unlike with the Heath Services sector, there were no commonalities with particular stocks that were driving the trend. Interestingly though, much of the funds driving the buying trends within this sector were non-US focused (i.e. Emerging Market, Global, International, etc.). This non-US focus directly ties back to the theme at the beginning of this paper – tariffs. The fund management team of the Brandes Emerging Markets Value Fund commented in their 1Q quarterly commentary, “We have also observed substantial value potential in select businesses in Mexico as the market remains concerned about tariffs… The Fund’s other Mexican holdings, such as telecom services provider America Movil, have significant exposure to non-Mexican peso currencies.”

Sources of Capital

“Our examination of what sectors were used as sources of capital for aforementioned purchases, we note:

• Deep Value investors rotated away notably from Technology Services and Producer Manufacturing sectors.
• Technology Services saw the largest outflows, totaling $6.2 billion in Q1 2025.
• Major driver was selling of Alphabet stock.
• Alphabet was the top performance detractor for Harris Associates’ Oakmark Global Fund.
• Fund manager David Herro noted Q4 2024 earnings met consensus, except for a slight miss in Google Cloud revenue growth due to short-term capacity issues.
• Long-term growth outlook for Google Cloud is viewed as strong.
• Alphabet seen as a collection of strong businesses benefiting from AI capabilities.
• Shares trading at ~15x next year’s estimated earnings, considered significantly undervalued.
• Despite this, the fund reduced its Alphabet exposure by approximately 13%.”

Trading Activity

High activity (>75%) occurred in 10 sectors, such as Producer Manufacturing (97.8%), Finance (94.6%), and Technology Services (92.5%). Lower activity in winners like Communications (51.6%) implies steadier, conviction-driven buying. High-volatility sectors like Retail Trade (88.2%), where elevated trading is already jumpy amongst deep value investors, tariffs hitting consumer goods could trigger even more instability within the sector.

Sector Diversification & Implied Value

Most sectors showed a negative diversification with deep value investors (indicating a higher concentration among a few holders, and investors maintaining more liquidity). With only three positives: Finance (5.6%), Technology Services (1.7%), and Process Industries (0.4%). Lowest were Consumer Non-Durables (-8.7%), Consumer Durables (-7.6%), and Retail Trade (-4.5%). Lower diversification in outflow-heavy sectors like Technology Services could amplify deep value investors sentiment to the downside, while Finance’s high diversification offers a buffer during high levels of volatility and uncertainty.

Conclusion

With political uncertainty weighing heavily on investors’ minds, institutional capital clearly leaned into sectors offering defensive growth and contrarian opportunity. Health Services emerged as a standout beneficiary, not merely due to favorable stock selection but because it aligned with deep value investors’ broader goal: to uncover temporarily depressed, misunderstood, or structurally undervalued assets that offer return potential.

The strategic overweight in health services stocks, specifically in companies like CVS and Cigna, underscores this conviction. Investors collective interest in CVS encapsulates deep value behavior: buying into fear, anticipating recovery. Cigna, too, illustrates a value-aligned thesis centered not just on recovery, but operational relevance. These stocks weren’t merely ‘cheap’; they were strategically resilient, less sensitive to geopolitical shocks like tariffs, and positioned for normalized earnings rebounds in 2025.

In contrast, sector outflows in Technology Services and Producer Manufacturing reveal the flip side of this rotation. Technology, once favored for growth, faced valuation compression and earnings-related disappointment (e.g., Alphabet), making it less attractive to value-driven allocators. Despite consensus expectations being met, underperformance in key segments like Google Cloud triggered reassessments and partial exits. This suggests that for deep value investors, valuation alone is not sufficient, companies must also exhibit short- to mid-term operational catalysts or margin of safety in times of volatility.

The larger takeaway: deep value investors in Q1 2025 demonstrated an active rotation strategy, exiting richly valued or high-volatile sectors like Technology and Manufacturing, while embracing sectors perceived as both oversold and politically insulated. High activity in Finance and Retail suggests anticipation of volatility, but the conviction buying in Health Services, along with low diversification plays, marks a targeted move toward sectors with tangible recovery paths.

This behavior affirms that deep value is not passive or reactive, it is forward-looking and willing to withstand short-term volatility in pursuit of long-term gains. As regulatory visibility improves and regulatory uncertainty stabilizes, many of these 2024-depressed health stocks may continue to serve as core holdings, reflecting the discipline and patience that define deep value capital allocation.

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