A choice between value and growth approaches to investing is an age-old one, and many investors are often dedicated to one style or the other. Sometimes, investors switch between styles, depending on which one they consider to be more successful at any given time. During growth stages, investors are more optimistic and many companies are undergoing long periods of significant profit growth, and trade at high price/earnings (P/E) multiples. For growth stocks, P/E multiples below 50x are considered cheap.
Value companies are at more mature stages of their development and have lower revenue and profit growth rates. Value approach to investing involves looking for companies with strong fundamentals that trade at low P/E multiples (or other variables indicating cheapness). P/E multiples for attractive value stocks are mostly below 12x-14x. Value stocks outperform growth stocks when the stock market is in a more mature part of the economic and business cycles.
In the past 30 years, there have been several periods where shifts have been seen between growth and value stocks outperforming the general market. In the 1990s, the market grew substantially with a high number of growth stocks from the technology sector, until these became overstretched and the dot bomb hit in 2000. From 2000-2008, during a switch from a bear to a bull market, value stocks significantly outperformed growth ones. Now, since the market trough in March 2009, the market appears to be favoring growth stocks. This is evidenced by the fact that the high-tech NASDAQ Composite index has since bounced up by almost 170% while the broad–market S&P 500 index has grown by around 130%.
The important question going forward is: Where are equity markets headed now in terms of value and growth stocks? In a recent interview with Yahoo Finance, David Nelson, Chief Strategist at Belpointe, expressed his opinion that the decline of the NASDAQ index by 8% in March-April 2014 was a warning about the coming change of the market’s footing from growth stock outperformance to value stock outperformance. Carter Worth, chief market technician with Sterne Agee, seconds this opinion (as per cnbc.com). He provided an example of the Russell 2000 index: in March 2014, growth stocks within the index were 4% down while value stocks within the index were 4% up. He expects that value stocks will now catch up with growth ones: they will not necessarily go higher but they may not drop as quickly as growth stocks if the market goes into a correction phase.
By: Ukrainian Credit Union Limited
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