So, is Einhorn and other value investors right to stick to their guns? Since the beginning of the bull market in March 2009, growth stocks have outperformed value stocks. The iShares S&P 500 Value Index (ETF) (NYSEARCA:IVE), which tracks the S&P 500 Value Index and has its largest holdings in Berkshire Hathaway Inc. (NYSE:BRK.B), JPMorgan Chase & Co. (NYSE:JPM), and Exxon Mobil Corporation (NYSE:XOM), has surged by 227% since March 2009. By comparison, iShares S&P 500 Growth Index (ETF) (NYSEARCA:IVW) that incorporates Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Amazon.com, Inc. (NASDAQ:AMZN) among its top holdings, has advanced by 302.62%.
One of the reasons why value stocks have underperformed growth stocks is that since the recession, the economic growth has been relatively slow, with many developed countries registering inflation below targets and investors chose to invest in companies that have potential to grow rather than those that look undervalued.
However, if we look closer at growth and value stocks, we can see a different situation. The tricky bit about growth and value stocks is that often companies exhibit characteristics of both. For example, General Electric Company (NYSE:GE) is part of both IVE and IVW ETFs. Apple Inc (NASDAQ:AAPL), while is viewed by many as a “go-to” growth stock is included in both growth and value ETFs and value investors like Einhorn and Buffett are bullish on the stock. Luckily, there are many “pure” growth or value ETFs as well, which focus solely on each of the two investment styles.
Let’s take a look at two funds from Guggenheim. Guggenheim S&P 500 Pure Growth ETF (NYSEARCA:RPG) takes into account traditional growth fundamentals like sales and earnings growth, and price momentum, while Guggenheim S&P 500 Pure Value ETF (NYSEARCA:RPV) includes a value basket that is based on traditional value fundamentals, such as price/book ratio, sales/price ratio, and earnings price/ratio (Guggenheim also has a blended basket that includes stocks with both growth and value characteristics). In the last three years, Guggenheim Invest S&P 500 Pure Value ETF (NYSEARCA:RPV) underperformed Guggenheim S&P 500 Pure Growth ETF (NYSEARCA:RPG) 21% to 36%. However, since March 2009, Guggenheim Invest S&P 500 Pure Value ETF (NYSEARCA:RPV) is up by 534%, while Guggenheim S&P 500 Pure Growth ETF (NYSEARCA:RPG) has gained 446%. So, pure growth stocks seem to underperform pure value stocks over the long run, which is in line with empirical research on the subject.
In 2017, value stocks also underperformed value stocks, but 2018 might be the year when the situation changes. Companies are maintaining their earnings momentum as economic growth doesn’t show any signs of slowdown and favorable environment should aid value stocks. Moreover, as the Fed intends to tighten monetary policy, higher interest rates might hurt growth stocks, while helping many banking companies that are generally perceived as value stocks. Oil and gas industry, another component of value indexes, is also expected to recover in 2018. Finally, there are concerns that the market is overheated, and growth stocks that had several years of sustained growth are poised to fall harder if the market turns south, which can result in investors’ sentiment switching towards value stocks.
Disclosure: none
