Value Stocks Are Beating Growth Again
Don't call it a comeback. At least not yet.
Value stocks have thoroughly trumped their growth counterparts since the start of this young century. The unwinding of the tech bubble led to significant relative outperformance by value stocks every year from 2001 through 2006.
Last year, however, growth stocks got going. In 2007, the iShares Russell 1000 Growth Index ETF (IWF) returned 11.6%, according to Morningstar, compared with a loss of 30 basis points for the iShares Russell 1000 Value Index (IWD). (A basis point is 1/100th of a percentage point.)
Many growth managers celebrated the victory, believing they had turned the tide. Fund managers believed the slowing economy would continue to favor their higher-multiple stocks as investors would search out companies that could provide top- and bottom-line growth.So far, last year's triumph is looking short-lived. Value stocks have fallen significantly less than growth year-to-date. The Russell 1000 value ETF is down 3.9% so far this year, versus a drop of 6.2% for the growth ETF. The average large-cap growth fund, according to Morningstar, is down 8% year-to-date, almost double the loss of the average large-cap value fund. Over the last three months the average large-cap value fund has lost 50 basis points, three full percentage points better than its growth counterpart. "As much as people don't want the growth stock boom to be over after one year of beating value, it looks like it very well may be," says Wendell Perkins, portfolio manager of the (OPLCX)Optique Large Cap Value fund. "It's basically a multiple issue. Value stocks are very cheap now at 10 to 12 times earnings, and some financial stock multiples have been beaten down into the single digits," says Perkins, whose fund is down 7% this year, but has returned an average of 12.4% annually over the past five years. "Dividend yields in many value stocks are at record highs -- assuming they won't be cut, of course." The best way to play the eternal struggle between the two asset classes, says Perkins, is for investors to "buy growth stocks at value prices." Perkins started his own shopping spree by picking up shares of retailer Kohl's (KSS). "Retail has been hammered, but it will come back first," says Perkins. "Kohl's still has growth opportunities embedded in it, whereas Target (TGT) and Lowes (LOW) are all tapped out when it comes to expansion. Three years ago Kohl's traded at a 35 multiple -- now it trades at 11 times forward earnings -- so it's cheap, and they have great cash flow to grow." Another one of Perkins' stealth value stocks is Checkpoint Software (CHKP). The internet and hardware security provider has "a lot of cash and no debt" and trades at a bargain 12 times 2009 estimates. "The knock on Checkpoint is that its top line has languished but they are trying to grow it now, organically and by acquisition," says Perkins. "Their new products are starting to take off and, in the meantime, it's just a cash cow." Perkins also calls IT outsourcer Computer Sciences (CSC) a great value at 11 times 2009 earnings. "Last year, value stocks were pummeled by the credit crunch and recession fears," says Perkins. "The feeling was that technology and growth would be immune and that worked in 2007 with the Nasdaq performing very well." Times -- and feelings -- seem to have changed.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV