Value Takes On Growth

Investors have shunned bargain-priced stocks in favor of fast growers for years. Is value due for a comeback?

- Ryan Ermey

Legends of investing, including Benjamin Graham and his disciple Warren Buffett, have long touted the advantages of value investing. Value stocks trade inexpensively compared with corporate measures such as sales, earnings and book value (assets minus liabilities). Historically, they have outperformed growth stocks, which boost earnings and sales faster than their peers. The thinking behind the value strategy is simple: Investors tend to bid up exciting, fast-growing companies to bloated levels and shun boring companies or those going through temporary problems.

When the market eventually comes to its senses and stock prices normalize, value wins. From July 1926 through May 2018, value stocks traded on U.S. stock markets outpaced growth stocks by an annualized 3.9 percentage points.

But for more than a decade, growth stocks have pummeled their bargain priced counterparts. Since the beginning of the last bear market in 2007, Standard & Poor’s 500 Value index, which tracks value oriented components of the broad market barometer, has returned a cumulative 77%, compared with a 179% return in the corresponding growth-stock yardstick. The walloping hasn’t been consistent; value outpaced growth in 2012 and 2016. Led by a still-booming tech sector, growth stocks in the S&P 500 have returned 11.6% so far in 2018, compared with 0.2% for value stocks. (Prices and other data are through July 13.)

Growth stocks usually sparkle in bull markets, but value shares tend to shine in down markets. At least that was the case between 1970 and 2006. When the stock market dropped 55% in the financial crisis and associated bear market of 2007– 09, value should have shone. Except that value-oriented financial firms were at the heart of the mess, and lost 82% over the period. From June 2014 to January 2016, energy stocks, also value stalwarts, lost 42% as oil prices plummeted.