The Growth Versus Value Gap Keeps Growing
Whether you’re a growth investor or a value investor, the odds are that you’re probably firmly planted on that side of the fence. The reality is that there’s always been a lot of disagreement over which investment strategy is the most profitable.
Considering the current climate, the debate of growth versus value is heating up again.
As you may know, growth investors are laser-focused on companies that achieve robust and consistent earnings growth. A company’s revenue growth is particularly important to growth investors, and they are often more willing to pay higher stock prices to benefit further from a company’s projected growth path.
Value investors, on the other hand, seek out overlooked and undervalued stocks. Typically, these stocks have lower valuations than their industry peers, as Wall Street has driven the stock lower based on poor earnings, bad press or product delays.[1] These stocks are often viewed as “diamonds in the rough.”
Clearly, both growth investing and value investing have merits. But which strategy is better?
According to a study by Bank of America/Merrill Lynch, value stocks have steadily outperformed growth stocks between 1926 and 2015. In fact, value stocks rallied 17.0% versus growth stocks’ 12.8% gain during this 90-year period. [2]
The Oracle of Omaha would certainly feel vindicated by these findings, as Warren Buffett is one of the most well-known and successful value investors on Wall Street. He’s even quoted as saying, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”[3]
Interestingly, though, value investors have been beaten up since 2015.
Consider this: In the past five years, the iShares S&P 500 Growth ETF (IVW) surged more than 70%, while the iShares S&P 500 Value ETF (IVE) rallied about 41%.[4] The divergence between IVW and IVE became particularly pronounced this year.
It’s worth noting that growth stocks perform well when interest rates are low. In periods of low rates, growth attracts a premium. Right now, interest rates are at rock-bottom levels, and the Federal Reserve is committed to keeping key interest rates near zero until 2022.[5]
In addition, we need to consider that companies’ fundamentals have been distorted due to the coronavirus pandemic. This is evident in recent second-quarter earnings announcements. According to FactSet, only 9% of S&P 500 companies have released results, and so far, it’s been a mixed bag. But what’s really concerning is that second-quarter earnings are forecast to plunge 44%.[6]
This type of earnings environment can be confusing for value investors. Stocks will certainly be trading at bargain prices, especially if Wall Street hits the stock after a poor earnings report. But it will be even harder to determine which stocks still offer value relative to their underlying fundamentals.
Will the recent gap in performance between growth and value stocks continue?
In the midst of the pandemic it is hard to say. We will know much more when there is a vaccine.
At that time the fundamentals will become clearer assuming the economy returns to where we were previously.
To learn more about our approach to selecting stocks for a portfolio, growth or value, give us a call.
Please click here for important disclosures.
[1] https://www.merrilledge.com/article/growth-vs-value-investing-two-approaches-to-stocks
[3] https://www.fool.com/investing/best-warren-buffett-quotes.aspx
[4] https://www.cnbc.com/2019/12/13/value-stocks-could-make-a-major-long-term-comeback-in-2020.html