Growth vs. Value – The Disparity in Performance in this Current Market Cycle

Adviser Mark Bordelove provides perspective on positioning your portfolio to take advantage of the trends.
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By Mark Bordelove

It’s a debate that is timeless. What is better, growth or value? The next question this leads to is always, what’s right for me?

Growth stocks can be defined as stocks with strong growth metrics that are designed to outpace the market and have potential for growth. Think mega–cap tech stocks such as Google, Amazon, Apple, and Microsoft among many others.

Value stocks can loosely be defined as stocks believed to be selling at a discount to their net asset value. They are regarded as inexpensive relative to their P/ E, book value, or other cash flow metrics. Think Comcast, Johnson & Johnson, Wells Fargo, Proctor & Gamble, and JP Morgan among many others.

This year the disparity between growth and value has never been greater and the reasons why might surprise you. The NASDAQ index is up roughly 30.25 percent and the value index is down roughly 14.25 percent.

A popular theory is that the “tech” stocks that have shown to be pandemic proof have absolutely dominated their industries and grown market share throughout the pandemic. Stocks such as Amazon, Apple, and Microsoft have proven to be the infrastructure of the work-from-home economy and their stocks have reflected this dominance. More traditional value stocks such as financials, energy, and industrials have been severely impacted during the pandemic and their stock performance reflect this.

Let’s look deeper and see what folks are thinking about regarding this disparity and how we are advising people to think about positioning their portfolios going forward to take advantage of the trends.

Let’s say, hypothetically, that you left your job in 2018 and last year rolled over your 401(k) to an IRA with a goal to build a “less volatile portfolio.” If you are generally risk averse but still want market exposure, you may like the idea of a value strategy. One approach within this strategy is a barbell approach where you have a mix of equity exposure on one end and more conservative investments like cash or bonds on the other end. For example, if you buy individual stocks you might consider mega cap technology as your growth piece in the portfolio. On the other end, deep value such as financials or health care can balance out the portfolio. If you would rather buy ETF’s to avoid single stock risk, there are many growth and value options to choose from to accomplish your goals.

The problem, at least this year, is stocks that look “cheap” on a valuation basis, such as the financial and energy stocks, just are not moving. There is no appetite for the financials because of interest rates being near zero. There is no interest in energy because of an oversupply of fuel. Stocks that look cheap are becoming what is commonly known as “value traps.” These stocks could be facing financial uncertainty or uneven future growth prospects. To put some numbers to the example, a value trap stock could be thought of as a stock trading at 65% of its historical 10 year average multiple. I’ve had conversations with clients about this. In a perfect world you would find a stock with a 10 P/E and growing earnings at a double digit rate. But those stocks, if they exist, are not being appreciated by the market. It’s hard for clients to understand this but that is the market we are in at this time.

What we have seen has been the dispersion in performance this year between growth and value.

Once you understand this trend is happening and why, you will be more confident in your strategy.

Let’s consider the growth investor.

Now let’s say you are a highly compensated executive in a local company and your objective is aggressive growth and you have an appetite for risk. We like to remind our client’s the market is a two way street. These situations don’t often end well unless managed properly. We like to remind people that have forgotten the lessons learned in 1999 and 2008 that you cannot always be static with your investments. Sometimes we have to be tactical given conditions at that time. To balance your portfolio, consider peeling back some overweight positions. What you need to concentrate on is being confident in your current asset mix and the goal to preserve the gains. And exercise patience. Let the market come in, correct, find a new comfortable level and rebuy if that’s what your goal is. Remember it’s a marathon not a sprint. The market gives opportunity every day.

The difference in performance between growth and value this year has never been more apparent. Every asset class has its moment to shine. By definition value will typically lag in a bull market when investors are clamoring for growth. It will outperform growth early in an economic recovery. If you look at the numbers over the last 25 years this is in fact the case. Coming out of 9-11 and the internet bubble recession of 2001 – 2002, value outperformed growth from 2003 – 2006. Also, following the credit crisis of 2008 – 2009, once again value led the charge from 2010 – 2012. Since 2012, it’s close but growth has led and that is not a coincidence given the fact outside of a few instances we have been in a pretty strong bull market. A good early sign that the tide is shifting back to value will be when financials, energy, and the industrials start to outperform the growth sectors.

Now appears to be the time for growth. Value will have its day. As long as we as advisors communicate to our clients the what and why of their portfolios and make sure they are fully engaged in the process, we hopefully will not have any issues with our clients.

About the author: Mark Bordelove

Mark Bordelove became a licensed financial advisor in 2000 and co-founded in 2009. A devoted husband and father, Mark has also completed two Ironman competitions

Mark Bordelove offers securities and advisory services through LPL Financial, a registered investment adviser, member FINRA/SIPC. Mark Bordelove and LPL Financial are not affiliated with Jim Cramer or TheStreet. This material was prepared by Mark Bordelove. This is a hypothetical situation based on real-life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial adviser prior to investing.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stock investing includes risks, including fluctuating prices and loss of principal.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.