Over the long haul, value stocks (which most conveniently can be defined as stocks with low price-to-book value) outperform growth stocks, asserts Stephen Leeb, editor of The Complete Investor.
But these relative gains mostly come during periods of inflation. Over the past 20 years, growth has outperformed value in part because rising commodity prices didn’t push inflation higher. (I discuss why in my new book, China’s Rise and the New Age of Gold.)
The crux of the value vs. growth argument is that when inflation is rising, book value and other value metrics probably are rising as well, benefiting value stocks.
At the same time, growth stocks lose their comparative edge because rising inflation serves to equalize growth across companies.
One indirect beneficiary of rising commodity prices is Berkshire Hathaway (BRK.B), which is also a holding in our model Growth Portfolio.
With its unassailable franchise in one of the world’s most critical businesses, property and casualty insurance, it is the standout value play among large-cap stocks.
Besides its dominant position in insurance, it has franchises in rails and even renewable energies, notably wind. It is positioned to ride higher commodity prices — a big boost to its railroad and energy franchise — to the hilt.
The stock has underperformed the market for about a decade. If we are right and inflation returns, this one-of-a-kind company should make up lost ground fast. Trading at a tiny premium to book value, Berkshire has one of the most compelling risk/reward ratios we have ever seen.
