The numbers are clear. Growth stocks have performed well1 in 2017 while Value stocks have lagged2 Forbes Editor, John Dobosz, interviewed John Buckingham at the MoneyShow San Francisco3. He started the interview with a pointed challenge; “Being a value guy, defend yourself!
“Valuations matter. At the end of the day we think that companies trading for reasonable prices are going to outperform those that are trading for expensive numbers.” – John Buckingham
You can read about the difference between Growth and Value stocks in a recent article where we discussed what Value stocks are, and why we favor them over Growth stocks. 2017 has been good for Growth stocks, but those aren’t the only numbers to consider. The broader numbers show that value has historically outperformed growth over a longer period of time.
Watch how John Buckingham responded to the challenge “defend yourself” in the video below.
Defending Being a “Value Guy” in 2017
Value stocks have historically won the long-term performance war (see Figure 1) by a wide margin. But Growth stocks may from time to time win short- or even intermediate-term battles (see Figure 2), as has been the case thus far in 2017, as well as over many more recent periods, with the Russell 3000 Growth Index performance topping that of the Russell 3000 Value Index.
“It’s very important when it comes to investing, in my opinion, to be disciplined and be consistent in your strategy. Too many people end up switching from value to growth to value to growth chasing returns. Because if you remember last year we out performed. Value, we were up 18%. S&P was up 12% and we did it with the same kinds of stocks that are underperforming this year.4”
Why Valuations Matter
“Valuations matter, at the end of the day we think that companies trading for reasonable prices are going to outperform those that are trading for expensive numbers.5”
We believe in traditional valuation methods of focusing on companies that trade for low price earnings ratios, low price to book value, low price to sales, etc.
However, the process is complicated and relative. You can’t compare how a company trades against all its peers in the entire investment universe; you will end up with skewed data. You must also look at where companies have traded historically. You should also consider where they trade relative to their peers.
Stay disciplined and consistent. For those who share our long-term time horizon, market history suggests that Value Stocks and Dividend Payers have been the place to be. Value stocks averaged a 13.4% annualized rate of return from 1927-2016. Dividend payers posted a 10.4% average annualized return over the same 89-year time period6. Three things make us optimistic about our portfolios:
- Still low but rising interest rates
- Plenty of undervalued stocks are still available
- Growth Stocks have outperformed in recent years
What About Retail?
We believe in broad diversification and NOT putting significant portions of our portfolio into retail. However, there are retail opportunities, but you must be selective.
There are plenty of retail companies that trade for low price earnings ratios, low price to book value, low price to sales, etc. – but, their earnings are low. Focus on retailers whose earnings are staying flat, are managing to navigate through the current difficult environment, and look like they will be survivors on the other side. If their earnings are flat, BUT their balance sheets are in excellent shape and they are debt free they could be a great choice.
Brick and mortar is not dead. Don’t’ fall for the media trap that “Amazon will take everyone’s lunch away”!
The Case for Value Investing
We believe that you pre-pay for expectations in growth stocks, whereas value stocks have already been discounted. This is why over the long-term, growth stocks have trailed value stocks, returning an annualized average of 9.4% while value stocks have returned an annualized average of 13.6% over the same time period.
1SOURCE: The Wall Street Journal. Large-cap growth funds returned 28.92% YTD as of 11.24.17
2SOURCE: The Wall Street Journal. Large-cap value funds returned 11.17% YTD as of 11.24.17
3MoneyShow San Francisco August 2017
No guarantee of investment performance or dividend payment is being provided and no inference to the contrary should be made.
Please note that the illustrated depictions of value and growth stocks are not intended to be representative of any individual product available through AFAM Capital, Inc.
Value stocks are shares of a company with solid fundamentals that are priced below those of its peers, based on analysis of price/earnings ratio, yield, and other factors. Growth stocks are shares of a company that are priced above those of its peers, based on analysis of price/earnings ratio, yield, and other factors. “Large” is defined by Fama & French as those stocks with greater than the median market equity of the dataset, and “small” is defined as those below the median market equity of the dataset.
The performance of growth stocks as illustrated is comprised of 50% small growth stock returns and 50% large growth stock returns. The performance of value stocks as illustrated is comprised of 50% small value stock returns and 50% large value stock returns. The performance of dividend paying stocks as illustrated is comprised of the returns of the 30% highest dividend payers, 40% mid-range dividend payers, and 30% lowest dividend payers – calculated using dividend yield. The performance of non-dividend paying stocks as illustrated is comprised of the returns of stocks that do not pay a dividend. All as of dates indicated, rebalanced monthly, and derived using data from Professors Eugene F. Fama and Kenneth R. French. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
Investing involves risk, principal loss is possible, and there can be no assurance that investment objectives will be achieved. The information presented herein is for discussion and illustrative purposes only and does not constitute investment advice. It is not a recommendation or an offer or solicitation to buy or sell any securities.
Information provided reflects AFAM’s views as of a particular time. Such views are subject to change at any point and AFAM shall not be obligated to provide notice of any change. While AFAM has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein.