Goldman Sachs' earnings results and financial sector performance for 2012 added in this update.



) -- Neither value nor growth stocks have been market leaders over the past year, something Citigroup analysts say is about to change.

In a surprise to Citigroup U.S. equity strategist Tobias Levkovich, the investment bank's quarterly survey of more than 100 institutional fund managers found that they expect value stocks -- those deemed inexpensive according to price-to-earnings ratios or other measures -- to outperform growth stocks -- which tend to do better when the economy grows quickly -- this year.

That's a sharp turnaround from Citigroup's last poll in October, when money managers favored value over growth after the U.S. debt ceiling drama and subsequent credit downgrade by Standard & Poor's resulted in a sharp selloff in equities.

Levkovich said the notion of value trumping growth this year "is reflected in the renewed preference for financials, which constitute a disproportionate share of value indices, possibly underscoring a sense that Europe will resolve its sovereign credit woes." European stocks and the euro were rising Wednesday morning on reports the International Monetary Fund is proposing a $1 trillion expansion of its lending resources to safeguard the global economy,



Financial stocks like

Bank of America

(BAC) - Get Report



(C) - Get Report

are up between 7% and 17% less than three weeks into the new year. Through last Thursday, the financial sector of the

S&P 500

was up more than 7%, the second-best sector performance behind only materials.

That rally was extended Wednesday after

Goldman Sachs

(GS) - Get Report

surprised Wall Street

with results coming in well ahead of profit forecasts despite weaker-than-expected revenue. Goldman Sachs shares were up 4% Wednesday and buoyed most other financial stocks. The

Financial Select Sector SPDR

(XLF) - Get Report

is now 6% so far in 2012.

Levkovich offers another reason why value stocks look more attractive than their growth counterparts.

"It may also be a manifestation of expected 2012 S&P 500 EPS growth from the buy side of more than 6%, on average, implying that the investment community is not as worried about margin pressures as we and others have contemplated," Levkovich writes.

These clients polled by Citigroup are bullish on equities, the U.S. dollar and technology stocks. They average about 9% cash as a percent of their portfolios that they are looking to put to work. They're also willing to shun bonds, utilities and telecoms, Levkovich says. So why should investors believe that value is the place to be in 2012, especially when most major investment banks are calling for a higher S&P 500 by year-end?

Over the past year, value stocks and growth shares moved in tandem. Small-cap value, small-cap growth, mid-cap value, and mid-cap growth mutual funds were each down about 3%, according to Morningstar. Large-cap value funds, meanwhile, rose 0.2%, slightly outperforming a 2% drop for large-cap growth funds.

Matt Swaim, managing director at Chicago-based value shop Advisory Research, says he understands perfectly well why value stock returns will outpace growth this year.

"All investors should be valuation conscious," Swaim says. "We'd rather have that risk/reward in our portfolio than a growth stock that runs into hiccups because they require capital at the wrong time or there are bumps in the economy. In this type of environment, given the prices you're willing to pay for value, it makes more sense."

In other words, with uncertainty stemming from Europe's debt crisis and the worries of a hard landing in China, investors would be smart to be price sensitive now, rather than pay high price-to-earnings multiples for growth stocks.

"You get so much more flexibility with a value stock," Swaim says. "They're generating excess cash flow. Private market values are higher than the public market values. That value can be unlocked as some of this private equity money or excess money from larger companies is put to work."

While financial stocks have gotten all the attention this year as the place to be for value, Swaim says Advisory Research sees more opportunity in industrial assets in the U.S. He argues these companies are generating higher cash flow. That will either lead to reinvestments in the company or distributions to shareholders.

"Whether that comes back to the form of dividends or put back into the company, it's better than speculating on growth opportunities," Swaim says.

Two of Swaim's picks are currently

Spirit AeroSystems Holdings

(SPR) - Get Report

, which designs and produces airplane parts to sell to


(BA) - Get Report

, and

Leucadia National


, a conglomerate with operations in manufacturing, winery operations, gaming, real estate and oil drilling.

Herb Chen, portfolio manager of the

Huntington Growth Fund

( HGWIX), has a different view on the value versus growth argument, as he himself is a growth fund manager. He argues that investors should be wary of broad brush strokes that tout value while discounting growth.

"There are different pockets of value and different pockets of growth," Chen says. "We're in some strange economic times lately. You need to have both growth and value and you need to be selective. Given the times we're at today, you can't make sweeping statements."

Chen notes that the portfolio managers at Huntington are finding value in the financial sector. "We're looking more favorably at financials than we have over the past year," he says. "I do think you'll find some value there, which you couldn't have said a year ago."

That said, he still argues that there is plenty of growth opportunities, particularly in the tech sector, that should be winners for investors in 2012. He still sees "huge upside" for


(AAPL) - Get Report

, one of the top holdings of the fund, as well as

Cisco Systems

(CSCO) - Get Report



(QCOM) - Get Report

. Each benefits from the proliferation of mobile Internet on smartphones and tablets, playing a critical role in the chain.

But even Chen acknowledges that value and growth stocks alike have a tough mountain to climb in the new year, although it's not hard to envision how growth shares can book gains this year.

"From a growth standpoint, I'd be looking for better global GDP," Chen says. "We are doing better in terms of employing people on the private-sector side, but we need to see more than that. And in Europe, we're still looking at how they'll handle their sovereign debt issue. If they deal with that appropriately, you could see a push toward growth."

-- Written by Robert Holmes in Boston


>To contact the writer of this article, click here:

Robert Holmes


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