Value is Out, Growth is Back In

The last 5 months has seen a collapse of Value's previous 6 year dominance over Growth. Since the Internet bubble burst, Value driven stocks trounced Growth, but lately that trend has reversed itself significantly.

Ranking all stocks in each market sector by various Value metrics and measuring the relative performance found that the 20% "best" Value stocks have underperformed the 20% "worst" Value (Growth) by nearly 30% since June. This is after a near 80% outperformance over the previous 6 years. Value stocks are getting pummeled, and not just in Financials. In every market sector, the "cheapest" stocks are lagging the "richest", at least measured by relative PE and other traditional value ratios.

Will this trend continue? Well, since 1971, there have been several multi-year periods when Value underperformed relative to Growth, and the recent 6 year dominance was a longer outperformance period than usual. So, it is likely that Value will continue to be "out" and Growth "in".

Yet, in case the beaten down Value stocks stage a reversal, it is probably best to keep some relative valuation criteria in your stock selection plans, as I do. The diversification benefit of utilizing multiple investment styles in an investment process helps one weather tough style performance periods such as this one for Value.

For now, go for the best priced Growth stocks with good price and earnings momentum, an avoid the deep value, out of favor Value names- they may stay cheap for a long time.