There are strong signs of a “great rotation” away from the growth companies that did so well for investors over the period since the 2007/8 Global Financial Crisis, the likes of tech stocks and pharmaceuticals, and into value companies such as oil, banking and retail that struggled to produce good returns over the same period.
The MSCI World Growth index lost 9.3 per cent in January. By comparison, the MSCI World Value index lost just 1.2 per cent.
This Is Money cites Ocado and BP as examples of how change is taking place.
Ocado is considered by many to be a tech firm more than a grocer, a growth stock that investors look at for future profits, whereas BP is a value stock, making profits now and trading on a low price to earnings multiple, with a big dividend yield, but seen as offering limited future growth.
Over the past six months, Ocado shares are down 36 per cent, while BP shares are up 30 per cent. However, over the past three years, Ocado is up 34 per cent and BP is down 25 per cent.
Chief market analyst at IG Group Chris Beauchamp told the website: “The baton of market leadership continues to pass to ‘physical economy’ stocks like BP and away from the ‘growth tomorrow’, one-hit wonders like Ocado.
“The divergence is stark, but reflects how investors have flocked to previously dull stocks like BP in order to benefit from the reopening of the global economy.”
Now, this may all be a blip.
Nevertheless, higher inflation and rising interest rates has brought investors to question whether profits today bought at a lower price might be a better option than growth tomorrow.
Growth stocks tend to have high price-to-earnings (P/E) and high price-to-sales (P/S) ratios. In other words, they tend to be more “expensive”. This is due to expectations from investors of high sales or profits in the future. Value stocks are usually big household names, with a perceived lower level of risk and volatility.
StockMarket.com notes: “The decision to invest in growth versus value stocks is ultimately left to an individual investor’s preference, as well as their personal risk tolerance, investment goals, and time horizon. There is no clear-cut winner. When the broader economy is in good shape, growth stocks on average tend to be the better performer. And during trying times, value stocks hold up better.”
Really, value stocks should be called cyclical stocks which are sensitive to economic activity e.g. banks, oil, retail. Growth should be split into Quality Growth, large, well-established businesses that have steady, long-term growth potential e.g. Microsoft, Google; and Deep Growth, usually fairly new businesses, often with brand new technology with exponential potential to grow revenues and hence share price.
Businesses often move from one category to another e.g. Unilever is really a Quality Growth stock because it produces steady revenues from selling branded consumer staples that have a long provenance and deep market penetration, but it is currently put in the value category because the share price is lagging and it is generally unloved by investors.
Long term investors should be looking for well-run, profitable companies, with strong cash-flow, high barriers to their market, access to new or expanding markets, where they are likely to increase revenues and profits over time. You then look at the price of shares in that business to decide whether it a worthwhile investment at that price. As long as your portfolio manager is doing this, you shouldn’t need to worry whether they are buying Growth or Value companies, just good companies at the right price.