One canonical way to split stock pickers is growth vs. value. Value investors are bargain hunters. They are often hoping for current business challenges the stocks they hold to improve. Example holdings for value investors are currently stocks like AT&T
Growth investors are optimists, happy to pay up for strong companies expected to deliver. A growth investor’s holdings today might include Visa
How Growth Has Delivered
It’s a continual tug of war between the two investment styles throughout stock market history, but U.S. growth investors have had a strong run for many years. Returns for the Russell 1000 growth index have been 17% a year on average over the past decade, for the equivalent value index it’s 10%. That’s a large spread, especially over an entire decade. There are a few reasons for it. Chiefly a period of low rates, tech largely delivering ahead of expectations and a favorable starting valuation for growth.
Low Interest Rates
Low and declining interest rates have potentially helped growth stocks. Low interest rates lowers the discount rate and so future earnings become worth more in today’s money. This is in contrast to value stocks, where low interest rates don’t help to the same extent. At a lower valuation, much of a value firm’s profits typically are expected in the next several years, rather than pushed out across decades as growth stocks often are.
Tech Trends Playing Out
Often the question for tech investors is will the new trends result in real profits for shareholders or be eroded through changing market dynamics and competition. For example, airlines and railways in their day were both new innovations for which investors held high expectations. However, generally profits pan out as expected. Indeed, the same was true of many dot com stocks in 2000s.
In contrast, in recent years, much of cloud technology and other innovations from online shopping to digital advertising have delivered for investors, generating both high growth and potentially sustainably high margins. Therefore in recent years, growth, at least in several key areas of tech, has generally lived up to, or exceeded, expectations. This doesn’t always happen. Of course, the macroeconomic climate, at least up until 2020, has been supportive too. Indeed, even 2020, despite massive disruption has accelerated adoption trends for many growth stocks from Amazon
In order for any asset class to have a big run of outperformance, it helps for it to be cheap at the outset. Back in 2009 growth stocks were, in retrospect, relatively cheap. That’s less true now, at least on static multiples, but relative cheapness did appear to help kick start growth’s recent run.
However, despite all of the above. It has historically been true that growth vs. value seems to run in cycles. Yes, since 2009 growth has generally be outperforming value. However from 2000-2008 value was trouncing growth. Prior to that, growth was in the driving seat and so forth. Hence, multi-year periods where growth or value dominate are historically common. Currently after growth’s strong run and relative valuations looking stretched, value may be set for a comeback, at lest.
Value stocks typically trade at half of the valuation of the U.S. market as a whole, on average. At the moment, large value stocks are trading at around a third or less of the U.S. market’s overall valuation. That’s unusually cheap, roughly the 10th percentile or lower. If the models are to be trusted, it suggests value may be a set for a good run, or conversely, growth investments may have a challenging setup ahead. The cyclical nature of market history and relative valuations both imply the growth may become less of a dominant theme compared to value in the years ahead.
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