Relative Performance of Growth vs. Value Stocks

The article cites the relative performance (between January 2009 and July 2018) of the Russell 1000 Growth and Value Indexes of 84% and 30%, respectively, adding that it is the result of both the low valuations of growth stocks at the beginning of the period and their strong earnings growth. However, it argues, “an important question remains: Since growth stocks sell at a forward P/E multiple of 20.9 compared to 14.4 for value stocks, is the size of the valuation gap justified?”

Using a dividend discount model, the article illustrates that, “by comparing the estimated fair forward P/E ratios, we find that growth stocks look overvalued relative to value stocks even after taking their superior growth rate into account.”

The conclusion: “Although a significant proportion of growth stocks’ recent outperformance is justified, there is a legitimate case for favoring value stocks over growth stocks at this time.”

For more trends, visit the Portfolio Construction Channel