Decoding the growth-vs-value performance split (2024)

FAQs

Decoding the growth-vs-value performance split? ›

Key Points. Growth versus value pits fast-growing stocks with big potential against solid performers that grow more slowly. Growth stocks can be attractive for investors with long time horizons, while value stocks often provide dividend income.

For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.

Growth and value are two fundamental approaches, or styles, in stock and stock mutual fund investing. Growth investors seek companies that offer strong earnings growth while value investors seek stocks that appear to be undervalued in the marketplace.

Notably, growth stocks are more volatile than value stocks but have the potential to rise in price substantially. On the other hand, value stocks are low-risk, and offer regular dividends but can't fulfill short-term investing goals.

Growth stocks carry relatively lesser risk because their growth rate is high and increasing. They are relatively less sensitive to adverse economic conditions than the overall market. Hence, growth stocks are relatively less risky investments. Value stocks come with lower metric ratios because they are undervalued.

The value score is subtracted from the growth score. If the result is strongly negative, the stock's style is value; if the result is strongly positive, the stock is classified as growth. If the scores for value and growth are not substantially different, the stock is classified as 'core'.

We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.

Stocks are always fully represented by the combination of their growth and value weights. For example, a stock that is given a 20% weight in a Russell value index will have an 80% weight in the corresponding Russell growth index.

Growth investors can use fundamental analysis ratios to compare a stock's intrinsic (or true) value to its market price. This can help them determine whether a stock is overvalued or undervalued. Growth stocks that are overvalued can decline and eventually trade at a price that reflects its current fundamentals.

Value investing and growth investing are two different investing styles. Usually, value stocks present an opportunity to buy shares below their actual value, and growth stocks exhibit above-average revenue and earnings growth potential.

Do value stocks outperform growth? ›

Value premiums have often shown up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was nearly 15%. On average, value stocks have outperformed growth stocks by 4.4% annually in the US since 1927, as Exhibit 1 shows.

Value stocks have more limited upside potential and, therefore, can be safer investments than growth stocks.

small-cap investing. Small-cap companies can be defined as growth or value companies: the growth companies are expected to grow their earnings at above-average rates, while the value companies are undervalued in price based on fundamentals.

By considering metrics such as revenue growth rate, EPS growth, ROE, P/E ratio, FCF growth, and market share, investors can make informed decisions when investing in growth stocks.

Arguably one of the best stock valuation metrics, the price to earning ratio communicates how cheap or expensive a stock is. The lower the price to earning ratio is, the more undervalued a company is.

Certainly, there is usually a positive correlation between the two. Slow-growth companies often sell at low valuations and high-growth companies often sell at expensive valuations. In an attempt to simplify, the two continuums are often merged into one, with value at one end and growth at the other.

Fama and French define value stocks as those stocks that have high ratios of book value to market value and growth stocks as those that have low ratios of book value to market value.

Value companies are typically mature, with stable earnings. This means they often return higher dividends to investors. Meanwhile, growth companies often reinvest earnings into their operations to drive future expansion – resulting in a lower dividend yield.

The Morningstar US Value Index returned 12% in 2023. That's pretty disappointing compared with the 26.5% returns from the Morningstar US Market Index, which tracks stocks in every category, and the 38.5% returns on growth stocks.

Companies are categorized by their size, sector, and financial valuation. The Russell 1000 Growth Index contains more expensive firms with higher expectations of financial progress, while the Russell 1000 Value Index includes companies trading at a discount due to mispricing or lower growth expectations.