For decades the discussion has been whether growth stocks outperform value stocks, or whether value outperforms growth. Before we review history though, and offer our observations, it may serve us to define these words as used for these purposes.
Growth stocks are typically defined as those companies in new industries, or companies disrupting existing industries, whose revenue growth prospects, and opportunities for market domination, are significant. They typically invest all earnings, provided they have any, back into revenue growth, and pay little to nothing in the way of dividends. Companies which fit this profile, some of which you will recognize, include Amazon, Alphabet (Google) Facebook, Netflix, Microsoft, Apple, Tencent, Sea Ltd, Ecolab, Zoom, Moderna, Teledoc, and Denali Therapeutics.
Value stocks tend to be companies in mature industries, whose growth generally follows the growth of inflation and the economy, who are consistently profitable, and who pay a significant portion of their earnings in dividends. Value stocks are easy to find in sectors such as energy, financials, food processing, and utilities, to name a few. Think ExxonMobil, J.P. Morgan, General Mills, and Southern Companies, for example.
Over the last 45 years, growth and value stocks have traded market leadership several times. Based on information from both MSCI (Morgan Stanley Capital International) and Standard & Poor’s, value stocks led returns from 1975 to 1988, with cumulative returns of 300% vs 115% for growth, and 2000 to 2006, with cumulative returns of 15% vs -40% for growth. Growth stocks led markets from 1989 to 1999, with cumulative returns of 620% vs 290% for value, and from 2007 to 2020, with cumulative returns of 200% vs 54% for value.
Time To Turn
Given the outperformance of growth over the last 13 years, when will value return to market leadership? We don’t know. There are many systems and methodologies designed to determine when various companies, sectors, or components of the market will outperform. The theories and methodologies include Dogs of the Dow, 50 and 200 day moving averages, Case-Schiller Index, the Dow Theory, and thousands of others. Those which have had success early in their utilization generally lose their edge as their predictive abilities become more widely used or available. This means that very few predictive systems or methodologies have been able to sustain decades-long success. And to our knowledge, no one has been able to predict successfully when market leadership will change from growth to value.
Looking at just the last ten years using SPG (Growth) and SPX (Value) as proxies, growth has had annualized returns of 13% while value has had annualized returns of 7%. Year-to-date, growth is effectively flat, while value remains off or down by 19%.
What’s encouraging? Two things. Financial journalists are writing about the death of value investing. And even Fama and French, who did much of the seminal research on the various factors which influence investment outcomes, are questioning the value of value investing. Generally speaking, we all reach bottom when mentally, we are ready to throw in the towel. You know the aphorisms – darkest just before dawn, etc. It appears that value investing is reaching this point, which should be encouraging.
Given that across decades, there is no statistical difference in return between growth and value investing, we have a preference for value stocks and funds. Part of this is likely experience (or age). Part of it is mercenary. With a value stock, a portion of the return shows up in cash, as a dividend. And we like cash flow. Partly as a way to enjoy an actual return now, partly due to tax efficiency, partly as a way to have consistent cash to redeploy.
As with so many things in life, there are no right or wrong answers to questions of whether we focus on value or growth. That decision is more a function of long-term plans, current needs, personal perspective, and experience.
Reach out if you would like us to help you evaluate progress towards your goals.
Until we see you again, we wish you well.