Here’s a great article at Forbes that discusses the possibility of value investing overtaking growth in 2018.
Here’s an excerpt from that article:
Since March 2009, growth and value stocks have pushed the U.S. stock market forward, with the two categories swapping leadership along the way. Until 2017, that is, when growth left value in the dust. Now it looks like value is ready to make a comeback.
First, we need to define growth and value stock investing
Growth investing is the search for companies that have the potential for superior growth in the future. Stock valuations are understandably higher for such companies. Value investing is the search for attractively priced stocks whose companies look stable/sound and offer the chance for improvement/growth in the future.
Importantly, active (vs. passive/index) managers practice different investing approaches/styles in both value and growth funds. All managers pursue superior returns, and that brings us to what has happened and how the tide could turn.
Growth vs. value performance results
Note: Although there are indexes that group stocks by growth and value, they are flawed by their dependence on past data. As discussed above, it is the “in the future” view that separates true growth and value stocks. Therefore, the results below are for two popular, actively-managed funds that use “multi-management” structures to diversify among different approaches/styles: Vanguard Morgan Growth (a growth fund) and Vanguard Wellington II (a value fund).
Performance from the March 2009 bottom
Two graphs provide the picture: (1) Total returns alongside the S&P 500 Index and (2) Relative returns to the S&P 500 Index.
The graphs show that both funds earned superior returns over the entire period, but they seesawed along the way. Coincidentally, the two funds ended 2016 at the same place. Then came 2017…
Performance from the beginning of 2017
Here, then, are last year’s results to current.
Now we can see the size of the growth outperformance. It raises the question of “What next?”
Where do we go from here?
In “U.S. Stock Market Signals ‘That’s All, Folks!’ – Time To Buy,” I explain why it looks like a new bull market leg is upon us. Given an up market, what’s next for growth and value?
Growth does not look stretched
While growth investing is popular, it does not show the over optimism that signals an overbought period. Helping curb excess enthusiasm is the periodic rough sailing for the five biggies that sit atop the S&P 500: Apple, Alphabet, Microsoft, Amazon and Facebook. Therefore, growth investing can continue to provide good returns.
Value has a leg up
While growth investing does not look toppy, value investing looks especially attractive. When investors ignore/overlook/dismiss an area of the stock market, relative valuations improve and the potential for outperformance builds. Therefore, value investing could provide higher returns this year.
However, beware these value traps
While today’s value investing outlook is bullish, there are three traps in this rising interest/inflation rate environment.
Yield. A focus on dividend yield means throwing oneself into the rising interest rate river that is flowing the wrong way for income securities. Therefore, avoid the ‘equity income’ type of value investing.
Utilities. Ignore the feeling that utilities should be a part of a value portfolio. They suffer from two serious problems: the high dividend/rising interest rates situation discussed above, and the sluggish rate relief from government regulators in rising inflation times.
Cheap. A common mistake is thinking “value” means “cheap.” Today’s stock market is widely followed and analyzed, and that is the wrong environment to find an overlooked, cheap stock, especially by using simplistic data screening. Therefore, consider “cheap” as a warning sign that something is amiss.
The bottom line
Growth investing powered the market last year, but it does not look overdone. With the recent drop, growth stocks readjusted and appear ready for a new bull market leg. At the same time, value investing, last year’s laggard, now looks especially attractive. It even has the potential to play catch up, thereby producing superior returns in 2018. The key approach, though, is to pursue “good” companies that offer sound value, not stocks that have simplistic characteristics of high yield or “cheap.”
You can read the original article at Forbes here.
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