Page 27 - Bulletin Vol 25 No 3 - Sept-Dec 2020 - Final

Article | Finance

Value vs. Growth: Which is Better?

By Christopher N. Congema, CFP

Landmark Wealth Management

Value stocks vs Growth stocks, which is the better investment? The debate between value investing
and growth investing is an ongoing one. Which is better depends on when you ask the question. It
is important to understand what the difference between the two investment categories are.

Value Investing: A value company is one that generally trades lower than its underlying
fundamentals suggest compared to the market or its sector. They often have higher dividend yields,
and trade at attractive (lower) price to earnings ratios (P/E). Stocks can be undervalued for many
reasons, but if the company’s financials are still relatively solid, then value-seekers may look to
these stocks as a good buying opportunity. The hope is the share price will soon recover or rise to
a higher level.

Growth Investing: Growth stocks are companies that are expected to grow faster than the average
rate of growth for the market. They normally trade at an elevated price to earnings ratio, and
generally pay either no dividend income, or have a nominal dividend income compared to the
overall market or sector. Different market cycles have favored value or growth stocks at different
times. Since the end of the financial crisis of 2008, growth stocks have been favored over value
stocks in most years. Investors have favored these more expensive companies.

An example of a value stock in today’s market would be a company such as Johnson & Johnson
(JNJ), which pays more than a 2.5% dividend. Johnson & Johnson is not expected to have the
same rate of growth as a company like Alphabet (GOOG); the parent company of Google, which

pays no dividend and is considered a growth stock. On June 30, 2020, the ten-year return for
the S&P 500 Growth Index was 16.36%. During the same period, the return for the S&P 500
Value Index was 10.69%. Growth index stocks do not always outperform index stocks. Over the
last 40 years, when the gap between the more expensive growth stocks and the more conservative
value companies tends to widen, the cycle typically reverses. After the great tech bubble implosion
that began in March of 1999, the cycle reversed and from 2001-2003 value stocks outperformed
index stocks.

During the 25-year period between 1990-2015, value stocks were favored. The returns were as
follows: The S&P 500 Growth Index returned 8.72%. The S&P 500 Value Index returned 9.58%.
On an annual basis, value outperformed growth 69% of the time over that same 25-year period,
providing for less overall volatility. This data was similar across large cap, mid cap and small cap
indices as well. Trying to determine when the cycle reverses is essentially a form of market timing.
However, it’s not much of a secret that the recent breakout from the bottom of the market in March
of 2020 has been led by a relatively small group of growth stocks that have significant weighting in
the S&P 500. This may indicate it is time for value companies to catch up. Perhaps it indicates the
present cycle will continue. One can never be certain.

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