A comparison of the iShares Russell 2000 Growth ETF (IWF) versus the iShares Russell 1000 Value ETF (IWD) indicates growth stocks are maintaining a long-running edge over value rivals. Add to that, value stocks are increasingly inexpensive, according to a slew of recent data points.
Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios.
Value investing is a popular long-term investment strategy. Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul, but that has not been the case for more than a decade.
“There’s never been a worse time in history to be a value investor,” reports Chris Matthews for MarketWatch. “That’s according to an analysis by J.P. Morgan’s chief U.S. equity strategist, Dubravko Lakos-Bujas, who wrote in a Thursday note to clients that ‘value is currently trading at the biggest discount ever, and offers the largest premium over the last 30 years.’”
Value Hunts For Vindication
This year, performances by value ETFs aren’t bad. IWD is higher by almost 15% while the iShares MSCI USA Value Factor ETF (CBOE: VLUE) is up about 12%.
VLUE “seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks with value characteristics and relatively lower valuations, before fees and expenses,” according to iShares.
Still, there is no denying value is really cheap by historical standards.
“After a decade when such growth stocks have outperformed their cheaper rivals, the median forward price-to-earnings ratio of the cheapest portfolio of S&P 500stocks is now trading at 7 times less than the broader to the S&P 500,” according MarketWatch. “’Similarly the relative price-to-book spread of the cheapest vs. the most expensive portfolio is at 9 times,’” Lakos-Bujas wrote.
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.
Value stocks and ETFs have recently rallied a bit, but some market observers are cautious on that theme.
“Lakos-Bujas argued, however, that this bounce will be short lived, due to structural factors, like the rise of disruptive technologies that have given many growth companies near-monopoly power in their markets, the rise of passive index investing, weak global growth and easy access to cheap capital globally,” notes MarketWatch.
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