Growth or Value Stocks?
07/30/2012 11:07 am EST
Mark Hulbert sees some signs that we are entering a period where value stocks will outperform growth, and he has some suggestions for where investors should look.
Growth versus value. What are the top advisors saying right now? Mark Hulbert has details on that. Mark, a big divide, usually.
That’s right, and I think if I look at what the tea leaves are saying in my analysis of the several hundred advisors at the Hulbert Financial Digest, I think it’s time for value to start coming back.
Growth has been dominating the market for several years. People have indeed started to wonder whether value will ever come back. I think now is that time. This next year is likely to see value stocks far outperform growth stocks.
I need to define my terms, though. Growth refers to stocks that are in favor. These are glamour stocks. The ones you see in the news. A classic one right now might be Apple (AAPL). They tend to trade for very high prices relative to underlying book value. The price-to-book ratio is typically the most widely followed ratio for defining what is a growth stock versus a value stock.
Value stocks tend to be out of favor. These are stocks that trade for relatively low prices compared to their underlying book value. So when you’re buying a value stock, you’re buying a stock that’s out of favor in anticipation of them coming back into favor, and it tends to go a little bit against human nature, because you want to of course buy a stock that’s in favor.
It looks great to buy Apple right now. Why buy a stock that’s out of favor? But it turns out historically, going back a century, value stocks historically have done better than growth stocks, but there have been these periods of time when growth has nevertheless bucked that historical trend.
The last five years have been one of those periods, and the only other period—and this is what I think is fascinating—that the market has ever seen a longer period in which growth has bucked that historical trend was the five years going into the top of the Internet bubble in 2000. And everyone there thought growth stocks were going to dominate permanently after that.
Of course, we saw what happened after the Internet bubble burst. In fact, in the bear market that began in 2000 and lasted until 2002, the average value stock actually made money. So when we talk about that bear market, there was really a growth stock bear market, but it really was not participated in by the average value stock. I think we might be able to see something similar coming up.
So yeah, history does leave some clues, hopefully. What stocks are the top advisors suggesting now?
I think most of them would suggest not trying to pick an individual value stock or a growth stock because we've seen...Apple being the classic case. Even though it’s already trading for fairly high price-to-book ratio, it can continue going for a long time.
So the best way of playing this bet if you do want to bet on value versus growth is a basket of stocks, and ETFs are the classic way. An exchange traded fund that’s pegged to the overall market.
IShares has a couple. One is an iShares Russell 1000 Value Index (IWD). That 1,000 stocks that are the largest cap stocks in the universe, they pick the value stocks from them, and it’s the Russell 1000 Value.
If you don’t want to make a bet on large cap and just want to make a bet on all value stocks over all growth stocks, then go with the Russell 3000 Value ETF (IWW).