The death of value has been greatly exaggerated
The death of value has been greatly exaggerated
Value stocks tend to trade at a lower price relative to their fundamentals, such as dividends, earnings, and sales, making them appealing to investors with longer time horizons. An example of a Value stock would be a well-established firm in what is often seen as the “old economy” such as Utilities or Oil Producers.
Growth stocks are firms that are anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is because the issuers are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term. The US stock market is currently dominated by Growth stocks such as Apple, Amazon, Zoom and Tesla to name a few; these may be seen as the “new economy”.
In recent years investors have shunned Value and favoured Growth; this has been accentuated by the pandemic as the need for Technology to allow home working or the delivery of goods has expanded exponentially. The graph below shows the performance of US Growth and US Value stocks compared to the overall US Stock market – the dispersion between the two has never been wider in favour of growth.
So, in the current climate should we all jump ship and opt for growth? We are not so sure.
The UK Stock Market has lagged the US in the last few years by some margin; primarily as it has significantly less exposure to large Technology firms like Google, Microsoft of Facebook; the old shares in BP or Royal Dutch Shell have performed poorly as dividends were cut and investors shunned fossil fuels – just as they shunned Banks post the Financial Crisis. However, we perhaps need to look back at a previous lesson at the turn of the Millennium when Tech ruled supreme and shares in Tobacco were shunned; by 2003 the position changed substantially Tech was down almost 90% and Tobacco up over 100% as Value taught Growth a lesson.
Could the same happen now? Investors certainly need to think about the possibility, firms such as BP and Shell have huge cash reserves and in the future may use this to pay dividends as well as continue their drive towards renewable energy, whilst the Banking sector could again start to pay dividends that attract investors. When we invest, we need to think about what the World might be like in the next 18 months and beyond and not just project current conditions into the future as if they will never change.
