Should Investors Turn from Growth to Value?

Markets have been looking weak over the last few trading sessions… With the warning signs in sight, should you consider switching from growth to value?

Value stocks generally consist of companies that have a sensible price-to-earnings ratio or price-to-book ratio. In contrast, growth stocks generally consist of companies who have a substantial amount of cash flow, which is expected to increase at a much faster rate than the rest of the market, but with extremely high costs fuel the growth.

Sometimes it’s better to be in value, and other times it’s better to be in growth…

Value stocks are slow and steady gainers. They have a product that is likely proven itself over time, while many often pay a dividend to their shareholders. Growth stocks are much more speculative. People tend to gravitate towards new technology that has exciting opportunities on the horizon. However, new opportunities are accompanied by substantially more risk.

People often jump in and out of the growth stocks all at once, causing huge price fluctuations.

The key to success and avoid big losses is knowing when investors want to buy growth or prefer to move their money into value.

We compared the iShares Russell 1000 Growth ETF (IWF) to the iShares Core S&P US Value ETF (IUSV). We see that growth has outpaced value, up 442% over the last decade, while value is up just 193%.

It seems like growth is the way to go, right?

If you’ve only been investing over the last several years, all you would know is growth growth growth. That would be too small of a sample. It pays to look back into history.

The fact is people can be excited about growth for a very long time. The on-ramp to some of these new technologies can take several years to play out.

Just think of the .com boom of the 90s. People were also very excited about growth and what the Internet can bring to business. But that soon fizzled out, and all the investors in growth soon realized they were in hot water come March 2000.

Between March 2000 throughout 2007, investors in growth lost 30%, while investors in value gained 63%. Throughout the 90s, most investors felt very similar to how we feel today. Growth just continues to outperform value, so why even consider value?

When the .com bubble burst, investors heavily weighted in technology lost a substantial amount of money. Value stocks suddenly started to feel a lot more appealing, and they stayed that way for eight years. That is until the financial crisis and the collapse of the housing market. Suddenly people decided to switch out of value go back into growth.

So, the question now… Is growth running out of steam? Is it time for another switch?

There will be a group of stocks that are setting up to outperform the market, but you want to play it safe in today’s over-inflated valuations. This means getting into the correct names that are setting up for a bullish run, then combining that with the right option strategy, such as a covered call, to protect your portfolio and increase returns. However, there is also a lot of money to be made on the downside when growth breaks again. This is why we need to understand options so we can apply the appropriate strategy for any given type of market, and make money with any market direction.