Advisors - June 22, 2022
Value vs Growth: Current Trends, Top Stocks & ETFs
The value vs. growth stocks debate is never-ending, and the past 12 months provide a near-perfect illustration of how regularly these equity styles ebb and flow. Growth stocks, represented here by the iShares S&P 500 Growth ETF (IVW), steadily outperformed its Value counterpart (IVE) over the course of 2021. Since the new year, that narrative has flipped.
In 2022, the tables have turned not just for Growth stocks, but equities as a whole. Both Value and Growth are in the red over the last twelve months, but Growth’s TTM performance is a full 6.3 percentage points below Value’s as of writing. Trading volume has been much heavier in the growth-centric IVW as well.
The S&P 500, represented below by the iShares Core S&P 500 ETF (IVV), is near a year-to-date low. Both the S&P 500 and Growth have entered bear market territory, with Growth down over 30%, its largest drawdown since March 2020.
The Long-Term Story of Value vs. Growth
Value and growth have each outperformed the other over certain time periods.. In recent years we’ve seen a steep divergence between growth and value, but growth’s steep drawdowns in 2022 have narrowed that gap.
The top half of the chart below shows rolling three-year total returns for the Russell 1000 Growth and Russell 1000 Value indices since the early 1980s, with the two regularly trading the lead. The lower panel illustrates the spread between the two, with a value above zero representing growth outperforming value.
It’s easy to get carried away when one equity class significantly outpaces the other, but when deciding between value and growth investing, it’s important to consider cyclicality, as well as your personal investment objectives and time horizon. To help in your decision making, we’ve outlined below the most important characteristics of each approach, how value and growth compare in terms of performance, and several ways YCharts helps uncover the best strategy for you and your clients.
The Top Growth & Value Stocks
The Top Growth Stocks table is based on YCharts’ “Trailing Revenue, EPS, and CF Growth”, narrowed to constituents of the S&P 500 Growth index. The result is a list of growth stocks with positive Revenue Growth, Diluted EPS Growth, and Cash from Operations Growth on a quarterly, annual, and 3-year basis. To identify the top 10 growth stocks, a Scoring Model which equally weights all growth metrics was applied.
Advanced Micro Devices Inc (AMD)
Nucor Corp (NUE)
CF Industries Holdings Inc (CF)
Pfizer Inc (PFE)
Freeport-McMoRan Inc (FCX)
Expeditors International of Washington Inc (EXPD)
Microchip Technology Inc (MCHP)
Weyerhaeuser Co (WY)
Monolithic Power Systems Inc (MPWR)
Celanese Corp (CE)
Similarly, the Top Value Stocks table comes directly from YCharts’ “Benjamin Graham Value Stocks” template and uses his principles to dial into the most attractive value stocks. The template filters for stocks with over $500M of annual revenue, current assets above twice their current liabilities, total long-term debt less than current assets minus total liabilities, Diluted EPS 10-Year Growth above 2.9, PE 5 less than 20.0, and a Price-to-Book less than 2.0.
Argan Inc (AGX)
Alpha & Omega Semiconductor Ltd (AOSL)
PC Connection Inc (CNXN)
D.R. Horton Inc (DHI)
Hooker Furnishings Corp (HOFT)
IPG Photonics Corp (IPGP)
Johnson Outdoors Inc (JOUT)
Lennar Corp (LEN)
LGI Homes Inc (LGIH)
Allscripts Healthcare Solutions Inc (MDRX)
Perdoceo Education Corp (PRDO)
QuidelOrtho Corp (QDEL)
Safety Insurance Group Inc (SAFT)
Shoe Carnival Inc (SCVL)
Seneca Foods Corp (SENEA)
Selective Insurance Group Inc (SIGI)
Toll Brothers Inc (TOL)
The Travelers Companies Inc (TRV)
UFP Industries Inc (UFPI)
Encore Wire Corp (WIRE)
The Top Growth & Value ETFs
The datatable above utilizes YCharts’ “Best Performing Growth ETFs” template, which screens for all ETFs that align with the growth equity style, an expense ratio less than 0.50, and Total NAV Returns category Rank less than 50 for the past 1-year, 3-year, and 5-year period.
iShares Core S&P US Growth ETF (IUSG)
iShares S&P 500 Growth ETF (IVW)
iShares Russell 1000 Growth ETF (IWF)
iShares Russell Top 200 Growth ETF (IWY)
Vanguard Mega Cap Growth ETF (MGK)
Nuveen ESG Large-Cap Growth ETF (NULG)
Invesco QQQ Trust (QQQ)
Schwab US Large-Cap Growth (SCHG)
Invesco S&P 500® Momentum ETF (SPMO)
SPDR Portfolio S&P 500 Growth ETF (SPYG)
Vanguard Russell 1000 Growth ETF (VONG)
Vanguard S&P 500 Growth ETF (VOOG)
Etho Climate Leadership US ETF (ETHO)
iShares Morningstar Mid-Cap Growth ETF (IMCG)
Alpha Architect US Quantitative Momentum ETF (QCOM)
Vanguard Mid-Cap Growth ETF (VOT)
Invesco S&P Mid-Cap Momentum ETF (XMMO)
Invesco S&P SmallCap Momentum ETF (XSMO)
The ETFs above were identified using the same criteria as noted above but for all ETFs along the value equity style with category rankings below 25 using the “Best Performing Value ETFs” YCharts template.
VictoryShares US EQ Income Enhanced Volatility Weighted ETF (CDC)
VictoryShares US Large Cap High Div Volatility Wtd ETF (CDL)
Columbia Sustainable US Equity Inc ETF (ESGS)
Fidelity® High Dividend ETF (FDVV)
Scwab US Dividend Equity ETF (SCHD)
Pacer US Cash Cows 100 ETF (COWZ)
SPDR Russell 1000 Yield Focus ETF (ONEY)
Principal Value ETF (PY)
Invesco S&P MidCap 400® Pure Value ETF (RFV)
Value and Growth Defined
Value investors try to identify companies with solid fundamentals which they believe are undervalued by the market. Alternatively, growth investors look for companies that demonstrate rapid revenue growth but have yet to reach scale or their full growth potential. It’s difficult to say which approach is superior because market conditions fluctuate, as do sector returns.
Key Characteristics of Value Stocks
Undervalued compared to their peers: Value stocks trade at lower valuations than other companies in their sector or industry. When share prices fall but a company’s underlying fundamentals remain strong, value stocks become “affordable” in the short-term and hopefully lead to long-term gains.
Lower P/E Ratios than the broad market: Even beyond a company’s closest competitors, value stocks are generally lower-priced than the broader market in terms of price-to-earnings (P/E) ratio, especially compared to growth stocks.
Less growth but reliable income streams: Usually larger and more established businesses, earnings of value stocks grow at modest but consistent clips. Because of their sizes, many companies opt to pay significant amounts of earnings directly to shareholders in the form of dividends, rather than reinvest them back into the business.
Less volatile than the broad market: Because value stocks are priced more conservatively, share prices often move less than the market average, and expectations are lower when companies report earnings. But the trade-off to price stability may be a longer holding period until payout, so value stocks are well-suited for long-term investors.
Key Characteristics of Growth Stocks
Track record of earnings and revenue growth: Growth stocks are typically less mature but have grown their revenue and earnings at a better-than-average rate in recent years, and are expected to continue doing so. Often, growth companies will ignore profitability to continue pushing revenue results. Consistently high growth rates for key top and bottom-line metrics justify their relatively higher valuations.
Higher P/E Ratios than the broad market: Because investors expect their earnings to continue growing, growth stocks carry high valuations such as above-average P/E, price-to-book (P/B), and price-to-sales (P/S) ratios. A strong Forward P/E, which considers estimates made by the company and Wall Street analysts, indicates an expectation of continued growth for these companies.
More growth with less reliable return on investment: Growth companies typically opt to reinvest earnings instead of paying dividends to shareholders. This makes an investor’s ROI dependent on the share price increasing, but when a growth stock plows earnings back into the business, it increases the likelihood of capital appreciation.
More volatile than the broad market: Due to their higher valuations, prices of growth stocks tend to be more volatile than the broader market average. When share prices are already lofty, they can plummet quickly if a company misses expectations, or when negative news, like a key employee departure, surfaces.
In addition to value vs. growth, investors also need to consider whether to use stocks or funds to implement these strategies. Mutual funds and ETFs offer broad exposure to value and growth strategies, capturing many companies that fit the bill, but also others that don’t. And stock pickers may be able to identify the single best value or growth company in the market, but also might choose incorrectly.
Performance of Value vs Growth Stocks
Investors are curious about which strategy generates more returns. The two strategies historically have had their fair share of ups and downs. As indicated by the returns table below, growth has handily outperformed value over most of the last fifteen years. However, Value has had its share of golden years as well, and even carries about a 1% edge over Growth since inception of the iShares Russell 1000 ETFs that represent Value and Growth.
Market cyclicality is an important factor to consider when comparing value vs. growth performance.
Growth stocks generally perform better during bull markets, when interest rates are falling, and when corporate earnings are trending up. However, during economic slowdowns, growth tends to lag behind value. Similarly, value tends to outperform growth during a bear market or economic recession, as well as in the early stages of an economic recovery.
Take for instance the recent fall and rise in long-term treasury bond rates. As interest rates rise and future cash flows are increasingly discounted, investors are likely rotating out of growth stocks and into less risky or speculative assets, such as value stocks and fixed income.
Company size (given by market capitalization) is also often a contributing factor. When further breaking down value and growth companies by size, such as large, mid, and small market capitalizations, more nuanced performance differences appear. There are over 77,000 funds available in YCharts, including some popular value and growth ETFs with strategies that incorporate market cap:
Using YCharts to Compare Value and Growth Stocks
YCharts features several tools and data sets to enable more informed comparisons of value vs. growth stocks or value funds vs. growth funds:
Create Value vs. Growth Stock Visuals
The charts above illustrate long-term performance for value and growth strategies, but what about individual stocks and the metrics that define them? Use Fundamental Charts to compare two companies based on underlying metrics that define value and growth opportunities, and over any time period. For example, put the P/E, P/S, and price-to-free cash flow ratios for Alphabet (GOOG) and Procter & Gamble (PG), two common top holdings in growth and value funds, respectively, head-to-head.
Generate Side-by-Side Comparison Reports
To compare growth and value funds in a client-friendly format, build a Side-by-Side Comparison report.
The example below pits two growth ETFs, Invesco’s Dynamic Large Cap Growth ETF (PWB) and Nuveen’s ESG Large-Cap Growth ETF (NULG) head-to-head on factors like holdings, performance, risk, and fees. Sending over a comparison report between the two funds can be accomplished in just a few mouse clicks, saving you time while ensuring your client gets the information they need swiftly.
As you can see, Nuveen’s Growth ETF has routed Invesco’s year-to-date, 1-Year, and 3-Year total returns all at a lower expense ratio. These quick and easy to generate comparison reports, provide a world of value for investors and their clients, ensuring visually appealing and straightforward analysis with an immediate impact.
Screen for Value and Growth Stocks, Funds & ETFs
Whether your mind is already made up on value vs. growth, or you want to dig a little deeper, the YCharts Stock and Fund Screeners narrow in on the best equities and funds for your portfolio. The YCharts Screeners feature several pre-built templates to make finding new investment opportunities even easier.
The Trailing Revenue, EPS, and Cash Flow Growth screen, one of many growth-focused Stock Screener templates, finds stocks with strong revenue growth, earnings-per-share (EPS) growth, and cash from operations growth over several timeframes. Other pre-built templates include the growth-focused Forecasted Growth Screen, and Relative Value Stocks and Dividend Growth Over Time for value-minded investors.
Evaluating value and growth mutual funds and ETFs is a slightly different analysis. With all fund managers trying to pick the best stocks, you can compare and contrast managers’ success by looking at those funds’ performance and risk metrics. Templates like Top Growth Funds and Top Value Funds help identify the best-performing funds of both styles:
Build Custom Scoring Models for Value and Growth Stocks
Once you have a more manageable list of securities (like the results from a screen above), use Scoring Models to create a custom score or ranking using the metrics you find most important. For example, the Value Score below incorporates relative P/E ratio, relative P/S and dividend per share growth, at varying weights, to compare several value stocks against each other.
Illustrate Risk vs. Reward with Scatter Plot
Looking for a more visual tool to conduct security analysis? Go beyond data tables using Scatter Plot to paint a pros vs. cons picture for a group of securities. The example below shows the risk and reward for the last five years of the top individual Value and Growth holdings:
Value vs Growth: Which Is Better For You?
Your preference for, or belief in, value vs. growth typically comes down to your investment objectives, risk tolerance, and time horizon. You may also prefer to achieve exposure to growth, value, or both via mutual funds and ETFs, or individual stocks.
Some general rules of thumb: growth may be right for you if you’re comfortable with larger price movements and you don’t need current income (by way of dividends), while you might prefer value if you’re looking for more stable investments that regularly pay dividends.
There’s also a case to be made for including both value and growth in your portfolio to smooth out times of volatility, and still keep pace when the market starts to run. “Blend” funds, created by asset managers, have emerged to achieve “growth at a reasonable price.” This hybrid approach focuses on companies poised for growth but still incorporates traditional value.
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