Growth stocks have been outperformed by value stock for the last half decade but now growth stocks look like a good "value"!
July 14, 2006 (Press Release) --
So why did I decide to add growth stocks to your portfolios after avoiding them for many years? In this edition of The Entrusted Steward I'm going to try and answer that question. Investors who want to become better stewards can sign up for The Entrusted Steward newsletter, for free, by going to http://www.diversifyyourassets.com.
First let us define exactly what growth stocks are compared to value stocks. Growth stocks typically have higher price to book ratios, forecasted earnings growth rate, and price-to-earnings ratios than value stocks. They also generally pay little or no dividends where as value stocks pay higher dividends. This is a very basic definition of what a growth stock is compared to the value stock. Why are growth stocks valued higher than value stocks? The reason is that value stocks are seen to be out of favor compared to growth stocks. Also, growth stocks are anticipated or forecasted to have better earnings and revenue than value stocks.
Much of the information in this newsletter comes from research of growth stocks in a recent white paper written by Tom Galvin and Rich Carter with US trust institutional titled, “The Return of Growth Stock Investing.” A year ago, I read a similar article by Ben Inker of GMO Investments titled, “The Problem with Value.” I decided to use the facts and figures from Galvin and Carter's research because it is more recent (2006).
The Facts
From a cyclical perspective, growth shares are priced at nearly a 40% discount to their longer-term relationship against value stocks. The four year duration of value out performance is matched only by the period from 1973-1976. The money that is allocated to growth mutual funds currently stands at the lowest percentage of total equity assets on record. The price to sales and the price-to-earnings ratios for growth and value stocks are starting to become more and more even. The premium historically placed on future revenues created by growth stocks would be labeled as a “value”. Another area that continues to concern me about value stocks, as a sector, is that financial stocks which make up roughly one third of all value stocks are starting to experience poor performance because of increases in interest rates. These same interest rate increases are causing crude oil price stabilization or a possible decrease and this is going to help tech stocks, in my opinion. Technology stocks make up roughly one third of most growth indexes. Over the past two years technology stocks have performed opposite to energy stocks.
I have always liked value stocks because during bear markets they do not go down as much as growth stocks and that is why I'll always have a portion of value stocks in your portfolios (for those with appropriate risk and goals). To summarize many of the graphs not pictured here in this newsletter, growth stocks became tremendously overpriced in 2000 and since then have become a good buy.
First let us define exactly what growth stocks are compared to value stocks. Growth stocks typically have higher price to book ratios, forecasted earnings growth rate, and price-to-earnings ratios than value stocks. They also generally pay little or no dividends where as value stocks pay higher dividends. This is a very basic definition of what a growth stock is compared to the value stock. Why are growth stocks valued higher than value stocks? The reason is that value stocks are seen to be out of favor compared to growth stocks. Also, growth stocks are anticipated or forecasted to have better earnings and revenue than value stocks.
Much of the information in this newsletter comes from research of growth stocks in a recent white paper written by Tom Galvin and Rich Carter with US trust institutional titled, “The Return of Growth Stock Investing.” A year ago, I read a similar article by Ben Inker of GMO Investments titled, “The Problem with Value.” I decided to use the facts and figures from Galvin and Carter's research because it is more recent (2006).
The Facts
From a cyclical perspective, growth shares are priced at nearly a 40% discount to their longer-term relationship against value stocks. The four year duration of value out performance is matched only by the period from 1973-1976. The money that is allocated to growth mutual funds currently stands at the lowest percentage of total equity assets on record. The price to sales and the price-to-earnings ratios for growth and value stocks are starting to become more and more even. The premium historically placed on future revenues created by growth stocks would be labeled as a “value”. Another area that continues to concern me about value stocks, as a sector, is that financial stocks which make up roughly one third of all value stocks are starting to experience poor performance because of increases in interest rates. These same interest rate increases are causing crude oil price stabilization or a possible decrease and this is going to help tech stocks, in my opinion. Technology stocks make up roughly one third of most growth indexes. Over the past two years technology stocks have performed opposite to energy stocks.
I have always liked value stocks because during bear markets they do not go down as much as growth stocks and that is why I'll always have a portion of value stocks in your portfolios (for those with appropriate risk and goals). To summarize many of the graphs not pictured here in this newsletter, growth stocks became tremendously overpriced in 2000 and since then have become a good buy.
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