2023-07-14 11:09:29 ET
Summary
- Over the past decade, growth investing has been the star of the show.
- Financials may have bottomed relative to Technology.
- That, in turn, brings back value investing.
Price is what you pay. Value is what you get.- Warren Buffett
The world of investment has been dominated by growth strategies for the past decade, with companies such as Amazon (AMZN), Apple (AAPL), and Google (GOOG) leading the charge. We all know about the " Magnificent 7 " stocks that have driven the S&P 500 (SP500) this year, and which killed all interest in value investing. But could value now be on the verge of outperforming growth because Financials look like they are about to lead again?
Value and Growth Investing: A Primer
Before we dive into the heart of the matter, it's crucial to understand what constitutes value and growth investing.
Value Investing: This investment strategy involves buying stocks that appear to be trading for less than their intrinsic or book value. Value investors actively seek stocks they believe the market has undervalued. They hope to profit by investing in these companies before the market corrects the price discrepancy.
Growth Investing: This strategy is centered on investing in companies that are expected to grow at an above-average rate compared to other stocks in the market. Growth investors are willing to pay high price-to-earnings (P/E) ratios for the stock with the expectation that rapid earnings growth will justify the high valuation. My favorite stock to pick on through my Tweets and Threads, Nvidia ( NVDA ), is a prime example of this.
The Current Investment Landscape: Growth's Reign
Over the past decade, growth investing has been the star of the show. The iShares Russell 1000 Growth ETF ( IWF ), a benchmark for large-cap growth stocks, has consistently outperformed its value counterpart. Tech giants, often classified under the growth umbrella, have driven this trend with their astronomical rises in stock prices. If we look at the iShares Russell 1000 Value ETF (IWD) relative to IWF, we can see it's been a wild ride since 2000, and that Growth versus Value looks toppy.
However, this dominance of growth strategies doesn't represent a universal truth in investing. The performance pendulum has swung between growth and value strategies throughout history, often influenced by macroeconomic conditions. The question on every investor's mind now is, "Are we about to see another swing?"
Financials vs. Technology: A Sector Analysis
An important factor to consider in the value vs. growth debate is the sector composition of these investment strategies. Traditionally, value stocks are often found in sectors such as Financials ( XLF ) and Energy ( XLE ), while growth stocks are prevalent in Technology ( QQQ ) and Consumer Discretionary ( XLY ) sectors.
However, this sector concentration is not set in stone. The sector composition of the Russell 1000 Value and Growth indices, which represent the value and growth sectors of the U.S. stock market, has evolved over time.
Currently, the growth camp is heavily tilted towards technology (43%), with consumer discretionary making up 16% in IWF.
On the other hand, value investing has a more diversified sector representation, with the largest weightings in Financials (20%) and Health Care (15%) in IWD.
This is ultimately a sector battle.
The Bottom Line: It's All About Financials
If indeed Financials have bottomed relative to Technology as appears to be the case, we could see a nice recovery in bank stocks which got beaten down during the regional bank "crisis" ( KRE ) we saw in March. Financials momentum could then feed into broader interest out of growth and back into value. This, if it happens, could be a significant source of relative outperformance for a period in time, and betting on Financials directly is the first step to that.
For further details see:
Financials May Steal Technology's Momentum Next