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This winning stock investment strategy may lose its mojo after 12 years



Has the tide finally turned in the epic stock market battle between value and growth? In that case, it will have been a long time: Growth has beaten value for 12 consecutive years, making the period since 2007 the longest exception in US history to the normal pattern of value surpassing growth.

During this period, value managers have predicted that the tide was in flux, and so far they have been wrong. Now they are cautiously, tentatively, and wondering if this time will be different: Value in September had one of the strongest months of many years, relative to growth – with the S&P 500 value index surpassing the S&P 500 growth index by 3.4 percentage points. [1

9659002] That's a huge margin, equivalent to an annual alpha of almost 50%. And while the value of alpha over growth in October has been lower, it is still well above historical averages – more than 11% year-on-year.

Why can this time be different? A perspective on this issue is provided by the chart below, which shows the relative performance of the S&P 500 growth index over the S&P 500 value index. Notice that the peak of the end of August in this relative performance reached almost exactly the same level as when the Internet bubble burst in early 2000.


It is remarkable, since it supports a different narrative of the past 12 years than it did. as is usually told. In fact, the chart supports at least three competing stories about where we stand in the struggle between value and growth:

  • The first story is the currently popular story, focusing on just the last 12 years. Since growth over this period has outstripped value, some have begun to argue that the world has changed permanently and that value can no longer be expected to beat growth in the long term.
  • The second narrative extends our focus to the period between 2000 and 2007. From that perspective, growth over the last dozen years has only corrected the extraordinary earlier period in which the value surpassed growth. (Supporting this alternate narrative is data from University of Chicago finance professor Eugene Fama and Dartmouth professor Kenneth French, which shows that the alpha value of growth after the peak of the internet bubble was greater than over any other period of similar length since the mid-1920s.)
  • A third story extends our perspective even further to the decade of the 1990s. From this point of view, Verde's huge alpha after 2000 was in turn a correction of the extraordinary alpha of growth in the decade of the 1990s.

My purpose in presenting these competing narratives is to make a broader point: Whatever you choose, recent periods of tremendous growth alpha appear to be less unusual than previously thought. Instead, we see only the extraordinary pendulum swings between these two investment styles.

If there is anything unusual with the past three decades, that is how large the fluctuations are between the extremes of growth over value. At the beginning of 2000, after a decade of growth, the value struck, many declared that the value was dead. In 2007, after seven extraordinary years of beating growth, it was the opposite. Now it's the opposite again.

Read: Value rotation at break or death in the water?

From this long-term perspective, there is nothing particularly unusual about recent growth in value outlook – and any expectation that the pendulum will eventually swing back.

To be sure, that does not mean that the recovery in late August of value above growth will be the beginning of a year-long trend. But this long-term perspective suggests that value investors should not give up hope.

To invest in value over growth, several exchange traded funds are at your disposal. Two that are compared to the S&P 500 Value index are the SPDR S&P 500 Value

SPYV, + 0.81%

and iShares S&P 500 Value ETF

IVE, + 0.86%

.

When it comes to individual securities, you should consider those recommended by at least two of the latest newsletters I am monitoring and which also have low price-to-book ratios. To put their ratios in perspective, consider that the S&P 500's price-to-book ratio is currently 3.4 to 1. (I removed the stocks from financial companies from this list, since their price-to-book ratios typically cannot be compared with those of other companies.)

Company

Ticker

Price-to-book ratio (per FactSet)

Air Lease

AL, + 2.00%

0.70

Molson Coors Brewing

TAP, + 0.32%

0.90

Mosaic Co.

MOS, -0.41%

1.09

Nutrien

NTR, -0.12%

1.17

WestRock

WRK, + 1.14%

1.18

SYNNEX

SNX, + 0.75%

1.19

General Motors

GM, -0.66%

1.21

Archer Daniels Midland

ADM, + 1.92%

1.21

Trinity Industries

TRN, + 1.83%

1.24

BP ADR

BP, + 2.11%

1.28

Mark Hulbert is a regular contributor to MarketWatch. Hans Hulbert Ratings tracks investment newsletters that pay a flat fee to be revised. He can be reached at mark@hulbertratings.com

More: This strategy beats a total equity fund and gives you more diversification

Read also: Bank of America declares "end of 60/40" standard portfolio


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