Growth Stocks Went From Leaders to Laggards, but May be Attractive

Growth stocks were leaders for much of the recently deceased bull market, but they’ve been drubbed on the back on the back of coronavirus fears. However, the market’s recent slide could present a silver lining for investors considering ETFs, such as the SPDR Portfolio S&P 500 Growth ETF (NYSEArca: SPYG).

SPYG, which tracks the S&P 500 Growth Index, and rival growth ETFs can actually perform well late in the business cycle. Investors can still enhance their portfolios as the bull market extends with growth-oriented stocks that continue to perform despite the recent bouts of volatility. The growth style has outperformed the market in spite of being prone to sell-offs with strong corporate earnings.

“A low-and-slow growth environment hasn’t been a major problem for stocks. Earnings growth in 2019 for S&P 500 firms is estimated to be 0.6% after all firms finish reporting,” said Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, in a recent note. “Three of the four quarters in 2019 had negative earnings growth, yet the S&P 500 returned more than 30% for the year. Trends in global earnings and equity performance were similar even though the IMF downgraded global growth to 3.1%, the lowest rate since 2009.”

Putting SPYG on Your Radar

Growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors.

“All this low growth has led investors to pay up for growth stocks. Growth stocks have outperformed the broader market and value exposures by 10% and 20%, respectively, since 2018,” said Bartolini.

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. Still, data suggest the growth/value premium isn’t overly elevated relative to historical norms.

“Growth will likely continue to outpace value. The price for growth will also continue to increase, which may lead to a more volatile return path with idiosyncratic drawdowns, something we saw glimmers of late in 2019,” notes Bartolini.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.