Value stocks, which have been lingering in the shadows while glamorous Growth stocks attracted many suitors, may be ready to bloom again. Let’s take a look at growth vs value stocks.
As Jane Austen put it:
“To look almost pretty is an acquisition of higher delight to a girl who has been looking plain the first fifteen years of her life than a beauty from her cradle can ever receive.” – Jane Austen
It took Value Stocks almost a decade to emerge, overshadowed by other sectors that have exploded in price. The Value stock sector just finished a 12-month low as a group in 2020.
Just look at how they did compare to Growth stocks in 2020: the Russell 1000 Growth Index returned 38.49%, while the Russell 1000 Value Index returned 2.8%, according to Morningstar. At the end of 2020, the S&P 500 Growth Index finished with a 33.5% total return (price plus dividends); compare that to a mere 1.4% return for the S&P 500 Value Index,
But now, investors are starting to see the subtle charms of Value Stocks (vs Growth Stocks) and are courting them again.
Alluring to New Investors
Why have they performed so poorly? The allure of Growth stocks was just too strong, for one.
In circus terms, Value stocks are the workhorses, while Growth stocks are the show ponies. Value stocks trade at lower price-to-earnings and price-to-book-Value ratios than some investors think the companies are worth. They are little gems, waiting to shine when the time is right.
Growth stocks, on the other hand, are young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market. In the last 10 years or so, investors have gravitated to Growth stocks.
Now, the pandemic has turned things around.
Pandemic Investing and the Growth Tech Sector
The pandemic initially sparked even more enthusiasm for Growth stocks. Many bored people at home decided they wanted to try their hand at stocks – and were attracted to the new, sparkly companies — especially the tech sector. They found the perfect toy with the Robinhood app, a trading app that soared in popularity with first-time investors. An easy money policy has meant more money around for investments. All those stay-at-home orders also meant less money for recreation and vacations – so more money to put away (or with playing with trading apps).
Some of the hottest stocks reflect the tastes of younger, more tech-oriented tastes: Etsy. Tesla. Shopify. Netflix.
Alas, the craze for Growth stocks might be reaching Bubble Land. Analysts are questioning the high premiums paid for Growth stocks. By Jan. 10, the S&P 500′s forward price-earnings ratio was just below 23; the level is close to record highs that go back to 2000.
Fears of inflation – as a result of an easy money policy – are making investors pause before buying Growth stocks and take a second look at Value stocks. The global economy will eventually recover as Asia emerges from the pandemic first; companies that are traditionally considered Value stocks will benefit, such as financials and energy.
Time to Choose: Growth vs Value Stocks?
If Value stocks continue trading at current spreads to the market and experience the same relative fundamental performance they have shown over the past 14 years, they could beat the market. We believe the outlook for Value is exceedingly bright from here, particularly in a long/short framework, which can profit from Value’s outperformance in both rising and falling markets.
To learn more about balancing your investment portfolio with Value funds, contact us or call 480.493.2300.
