Has the tide finally turned in the epic stock-market battle between value and growth? If so, it will have been a long time coming: Growth has been beating value for 12 years running, making the period since 2007 the longest exception in U.S. history to the normal pattern of value outperforming growth.
Throughout this period, value managers have made predictions that the tide was turning, and up until now they have been wrong. Now they are cautiously, tentatively, wondering if this time will be different: Value in September had one of its strongest months in many years, relative to growth — with the S&P 500 Value Index outperforming the S&P 500 Growth index by 3.4 percentage points.
That’s a huge margin, equivalent to an annual alpha of nearly 50%. And while value’s alpha over growth in October has been less, it is still well above historical averages — more than 11% on an annualized basis.
Why might this time be different? One perspective on this question is provided by the chart below, which plots the relative performance of the S&P 500 Growth Index over the S&P 500 Value Index. Notice that the late-August peak in this relative performance came at almost precisely the same level that prevailed when the internet bubble burst in early 2000.
That’s noteworthy, since it supports a different narrative about the past 12 years than is usually told. In fact, the chart supports at least three competing narratives about where we stand in the battle between value and growth:
- The first narrative is the currently popular one, focusing on just the past 12 years. Since growth over this period has so outperformed value, some have begun to argue that the world has permanently changed and value no longer can be expected to beat growth over the long-term.
- The second narrative expands our focus to include the period between 2000 and 2007. From that perspective, growth over the last dozen years has merely corrected the extraordinary prior period in which value outperformed growth. (Supporting this alternate narrative is data from University of Chicago finance professor Eugene Fama and Dartmouth professor Kenneth French, which show that value’s alpha over growth following the top of the internet bubble was greater than over any other period of similar length since the mid-1920s.)
- A third narrative expands our perspective even further to include the decade of the 1990s. From this point of view, value’s huge alpha after 2000 was in turn a mere correction of growth’s extraordinary alpha in the decade of the 1990s.
My purpose in presenting these competing narratives is to make a broader point: Whichever you choose, the recent period of a huge growth alpha appears to be less unusual than previously thought. Instead, we merely see the extraordinary pendulum swings between these two investment styles.
If there is anything unusual about the past three decades, it’s how big the swings are between the extremes of growth over value. In early 2000, following a decade of growth beating value, many were declaring that value was dead. In 2007, following seven extraordinary years of value beating growth, it was just the opposite. Now it is just the opposite again.
Read: Value rotation on pause or dead in the water?
From this longer-term perspective, there is nothing particularly unusual about growth’s recent outperformance of value — and every expectation that the pendulum will eventually swing back.
To be sure, this doesn’t mean the late-August resurgence of value over growth will be the beginning of a years-long trend. But this longer-term perspective does suggest that value investors shouldn’t be giving up hope.
To bet on value over growth, several exchange-traded funds are at your disposal. Two that are benchmarked to the S&P 500 Value index are SPDR S&P 500 Value SPYV, +0.28% and iShares S&P 500 Value ETF IVE, +0.26% .
As for individual value stocks, consider those recommended by at least two of the top performing newsletters I monitor that also have low price-to-book ratios. To put their ratios in perspective, consider that the S&P 500’s price-to-book ratio currently is 3.4 to 1. (I eliminated from this list the stocks of financial firms, since their price-to-book ratios typically aren’t comparable to those of other companies.)
| Company | Ticker | Price-to-book ratio (per FactSet) |
| Air Lease | 0.70 | |
| Molson Coors Brewing | 0.90 | |
| Mosaic Co. | 1.09 | |
| Nutrien | 1.17 | |
| WestRock | 1.18 | |
| SYNNEX | 1.19 | |
| General Motors | 1.21 | |
| Archer Daniels Midland | 1.21 | |
| Trinity Industries | 1.24 | |
| BP ADR | 1.28 |
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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