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Value Lives

By Frank Armstrong

If you haven't noticed, value is back. So much attention has been focused on the collapse of the growth and tech sectors that you might be forgiven if you thought that the whole market had tanked. It hasn't. Value investors are doing quite nicely, thank you. Amid the widely reported carnage value investors are actually experiencing strong profits! But, the media seems to be totally ignoring the story.

The long dry spell

It's been a long dry spell for value investors. Growth was the fad de jour for the entire last half of the nineties, driving up prices to unsustainable levels. For a while, many investors convinced themselves that growth was a risk free investment. Value investors were ridiculed and scorned as the growth/tech bubble steadily inflated. But, after several years of disappointing relative performance, value is outperforming growth by some of the widest margins ever.

Recent performance

During year ending February 28, 2001 the S&P 500 lost 8.2%. (See below for definitions of each of these indexes). But look what happens if we split the index into growth and value. The S&P 500/Barra Growth index lost -25.79% while the S&P 500/Barra Value index gained 13.73%. That's a difference of 39.52%!

The same relative performance held for smaller stocks. The S&P Small Cap 600 index lost 0.37%. But the S&P Small Cap 600/Barra Growth lost a staggering 22.72%, while the S&P Small Cap 600/Barra Value gained an impressive 25.97%. The spread between the growth and value sides was an astounding 48.69%!

Value and growth defined

As a quick review, growth companies are generally healthy, and have good prospects. Value companies are distressed and suffer from weak financial performance. Being ugly, nobody really wants to buy them. So, the price of value stocks gets driven down until a buyer could expect a higher return from buying a poorly performing company than buying a glamorous growth stock. An economist would say that distressed companies have higher costs of capital, and that cost is reflected in the stock price. The additional return that value investors earn is called the value premium.
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