Growth Stocks Clobbered: A Changing of the Guard to Value?
Matt Weller, CFA, CMT September 13, 2019 7:07 PM
This week’s price action suggests that we may be nearing a “changing of the guard” to value stocks
Since at least 1934, Ben Graham published his seminal book Security Analysis, value investing has been arguably the single most successful strategy. After all, who could argue with buying companies that are cheap relative to underlying fundamentals like earnings, sales, and dividends?
Well, after a decade’s worth of underperformance, even the most diehard value investor is asking whether the strategy is obsolete in an era of relentlessly growing technology platform companies like Facebook, Apple, Amazon, Netflix, and Google.
While it’s a bit beyond our typical traders’ timeframe, we would note that similar periods of extended value underperformance have eventually led to dramatic reversals back in favor of cheap stocks. After trailing the S&P 500 in the peak of the tech boom from 1996 to 1999 (to say nothing about the more dramatic moves in the high-flying Nasdaq), Warren Buffett’s value-focused Berkshire Hathaway went on to outperform the index by nearly 25% per year from 2000-2002!
This week’s price action suggests that we may be nearing a similar “changing of the guard” back toward value stocks. With more than $85B in combined assets, the Russell 1000 Growth and Value ETFs (IWF and IWD, respectively) represent a massive allocation to the opposing investment strategies. As the IWF/IWD ratio chart below shows, growth has been dramatically outperforming value over the last three years:
Source: TradingView, City Index
While the trend in this chart is clearly higher, we wanted to highlight this week’s big drop in the ratio. As of writing, growth stocks (IWF) have underperformed value stocks (IWD) by 2.8% this week alone. If it holds through the rest of the trading day, this would mark the biggest shift in favor of value stocks since the Great Financial Crisis in 2009!
Of course, we’ve similar one-week “growth panics” do little to deter the long-term trend in favor of growth, but at a minimum, this week’s drop should serve as a reminder that growth doesn’t always outperform value, and could lead to more two-way trade moving forward.
For an alternative (or at least more balanced) view, see my colleague Ken Odeluga’s article “Nasdaq bounce shoves aside value ‘comeback’” from earlier this week!
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.