Value Investing Starts to Outpace Growth in New Year

As market loses momentum value stocks begin to show their resistance so far

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Mar 04, 2016
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Value began to outpace growth in 2016 after investors bid up new internet and technology companies to lofty valuations over the past decade.

The S&P 500 Growth index fell 3.52% year to date after a 1% slide in February, versus a 1.38% decline of the S&P 500 Value index after it etched a 0.21% gain for the month. The switch in the young year offers little evidence that a long-term trend will continue to reverse: The growth index has beaten value over the past one-, three-, five- and 10-year periods on a price-return basis.

It comprises stocks chosen for sales growth, ratio of earnings change to price and momentum, with top positions in Apple (AAPL, Financial), Microsoft (MSFT, Financial) and Facebook (FB, Financial). The value index includes stocks for their book value, earning and sales to price, and has largest allocations to Exxon Mobil (XOM, Financial) and Berkshire Hathaway (BRK.B, Financial).

Some have argued that the makeup of the two indexes does not accurately portray the performance of either label.

“There are issues with two of the definitions S&P 500 uses for value,” Ben Strubel, portfolio manager of Strubel Investment Management, wrote in a February GuruFocus article. “It uses sales to price and book value to price. While these measures may have been appropriate for the stock market in Ben Graham’s day when a large portion of stocks were in similar asset-heavy industries such as manufacturing, energy or utilities, they are wholly inappropriate for today’s diverse market.

Other signs pointed to a verdant few months for value. The HFRX Equity Hedge Fundamental Growth Index posted a 7.9% decline for the year to date through March 2, compared to a 3.5% loss for the HFRX Equity Hedge Fundamental Value Index. That growth index also showed a 3.18% decline in February, versus a 0.24% decline for the value index. Several of the value index’s sectors, industrial and communications, began to rise during the month, while European and financial stocks fell. The HFRX Equity Hedge Index sank 4.6% year to date and 1.1% in February.

Guru actions with stocks deemed growth and value in the fourth quarter showed that they crossed lines to opt for more growth stocks, highlighted the differences among definitions of “value” or showed that long-term performance for value managers might be better than S&P indexes indicate.

More gurus, most of whom use a value strategy, purchased shares of Apple, the largest position in the S&P 500 Growth Index, than any other S&P 500 stock, according to the S&P 500 Screener. Further, six out of the top 10 companies in the growth index were among gurus’ top 20 most-bought of the S&P 500. Only five of the top 10 companies in the value index were among gurus’ top 20 most-bought stocks for the quarter. One, Johnson & Johnson (JNJ, Financial), appeared in the top holdings of both indexes.

See more of the buys and sells of gurus at the S&P 500 stock screener here. Not a Premium Member of GuruFocus? Try it free for 7 days.