Value Vs. Growth Stocks

Value Stocks act as shelters from the cyclones sweeping markets nowadays. The current quarter's underperformance of growth versus value stocks is the worst since the dot-com bubble as shown in the below graph.

Source: The Daily Shot

 First, let’s define both types of stocks; Growth stocks are stocks that are expected to grow at a rate significantly higher than the average growth rate of the market and are expected to yield capital gains in the future. They usually do not pay dividends as the board of directors tends to retain their earnings in order to grow. Some of the famous examples of growth stocks are Amazon Inc. (AMZN), Meta Platforms Inc. (FB), Apple Inc. (AAPL), and Netflix (NFLX).


While value stocks are undervalued stocks i.e., those trading at a price lower than their intrinsic price making them attractive for investors. Value stocks usually provide high dividend yields, have a low price-to-book value ratio (P/B), and a low price-to-earnings ratio (P/E). They also tend to underperform relative to their competitors in the industry, and good value stocks have high free cash flow which is the money left after paying for all operating and capital expenditures despite weak earnings. The P/B ratio is calculated by the market price per share by the book value per share, and the p/e ratio is calculated by the market price per share per earnings per share. Examples of value stocks are Johnson & Johnson (JNJ), JP Morgan Chase & Co (JPM), and Wells Fargo & Co (WFC). Value stocks are considered a long-term investment strategy; they are riskier than their growth counterparts.


Below is a graph showing the fundamentals as of April 29th of 2022 associated with the MSCI World Value Index, and the MSCI World Growth Index which capture large and mid-capital securities exhibiting overall value and growth style characteristics, respectively. Value characteristics include book value to price, 12-month forward earnings to price, and dividend yield across 23 Developed Markets (DM) countries, growth characteristics are constructed using long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate, and long-term historical EPS growth trend and long-term historical sales per share growth trend.

Source: MSCI (April 2022)

The MSCI World Value Index has declined from approximately 7% in 2022 on a total return basis, better than the 25% decline for the MSCI World Growth Index. Value stocks have generated around 30% by mid-May. Value investing shines during the monetary policy tightening all over the world in which the aggregate return of value factor is around 8%; the value factor is an attribute of stocks that are chosen by factor investors believing that these stocks are inexpensive relative to some measure of fundamental value outperform those that are pricier, as seen in the graph below. On the other hand, growth stocks valuations have overstretched implying an inevitable reversal soon. AQR Investment firm posits that the value spread which is the dispersion between the valuation of value and growth stocks is as wide as it was during the peak of the dot-com bubble in 2000. Value Stocks are expected to generate annual returns of 4.1 % over the next decade, according to Vanguard. Value Stocks are not only taking the lead but also growth-focused stocks encounter huge selloffs; US-listed growth ETFs have had around $ 2B in the first quarter of 2022, while US-listed value stocks have a generated net inflow of $ 37.6B

Looking at the performance of value and growth stocks over history, we can observe that value stocks have always outperformed growth stocks during crises, as seen in the graph below.  During the Dotcom bubble in 2000, we can notice the ratio of iShares Russell 2000 Value ETF (iShares Russell 2000 Growth ETF (IWO) increasing i.e., the value ETFs are outperforming, then recorded a historical peak during the 2007-2008 financial crisis, again outperforming during the United States debt-ceiling crisis of 2011. Also, with the rise of the US-Chinese war in 2017 causing turbulence in the market, value stocks outperformed, and another upward trend can be seen during the pandemic crisis of 2020. Finally, another trend showing that value stocks are outperforming nowadays amid the geopolitical tensions in Ukraine and Russia, supply chain disruptions as a result of the pandemic, and the recent lockdowns in strategic industrial cities in China that halted businesses around the globe causing historical inflation figures which central banks are trying to combat globally.


Ratio of iShares Russell 2000 Value ETF (IWN) to iShares Russell 2000 Growth ETF (IWO)| Source: TradingView (May, 2022)



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