Time ripe for a shift from growth to value stocks

Experts say value stocks will be especially appealing as the US economy accelerates

NEW YORK • A long rally in technology stocks has left investors thirsting for more, but that could be a mistake as the strengthening US economy points to better value in other stocks.

Heavyweights like Apple, Alphabet and Facebook have especially helped growth indexes in the past year rise more than value indexes, which right now are heavily weighted in financials.

So far this year, tech is the best-performing sector too, leading the recovery from the market's steep sell-off early last month, with the Nasdaq hitting record highs again in recent sessions. That is reflected in the performance of major benchmarks for portfolio managers, including the Russell 1000 growth index , up 6.1 per cent so far this year, compared with the Russell 1000 value index, down 0.5 per cent since Dec 31.

But some money managers are betting that trend may have gone on for too long.

They argue that value stocks, which tend to have lower valuations, will look especially appealing relative to growth stocks as the economy accelerates above its historic growth rates.

"That growth has continued for as long as it has, and as lopsided as it is, doesn't mean the world has changed. It means we're overdue for the pendulum to swing back to value," said Mr David Katz, chief investment officer at Matrix Asset Advisors in New York.

Growth and value are two classic approaches to investing, with growth investors typically searching for companies that have higher profit growth and margins, while value investors look for stocks that seem undervalued. A shift from growth to value could come slowly.

Technology heavyweights like Apple, Alphabet and Facebook have helped growth indexes rise more than value indexes in the past year. PHOTO: AGENCE FRANCE-PRESSE

Based on Thomson Reuters Lipper data, so far this year, US fund investors have been pulling more money out of value funds than growth. To be sure, many tech stocks do well when the economy improves, and every sector has stocks in both value and growth. Mr Katz thinks banks, energy and some stocks in healthcare, including Gilead Sciences, make good value buys right now.

Helping the argument for value, some strategists say, is a robust economic expansion in the United States. Growth stocks mostly have outperformed value since the bull market began nine years ago and far outpaced them last year, when the S&P technology index rose nearly 37 per cent compared with the S&P 500's gain of 19.4 per cent.

The price-to-earnings ratio for the Russell growth index last year hit its highest since 2002. The index is now trading at about 20 times forward earnings, down slightly from recent levels. The value index is trading at less than 15 times earnings, its lowest since 2016, according to Thomson Reuters DataStream data.

"It's a valuation argument. Growth has done phenomenally and the valuations reflect that," said Mr Ernesto Ramos, head of quantitative equity strategy at BMO Global Asset Management.

Multiples have risen "across the board", said Mr Michael O'Rourke, chief market strategist at Jones Trading in Greenwich, Connecticut. But, he said, "if everything is expensive, value offers a higher margin of safety".

Financials - which benefit from higher interest rates and would get a boost from reduced regulations that are expected under the Trump administration - have the biggest weighting in the Russell value index, accounting for about 28 per cent of the index, according to Thomson Reuters data.

Technology as a sector has the biggest weighting in the Russell 1000 growth index, accounting for roughly 39 per cent.


A version of this article appeared in the print edition of The Straits Times on March 16, 2018, with the headline 'Time ripe for a shift from growth to value stocks'. Subscribe