Value vs. Growth: Last time growth was here relative to value was in 2000
There are hundreds of investment factors and characteristics that help drive returns. For me, I’m a (relative) value or growth (at a reasonable price) investor. I want to tilt my portfolio to the factors that I think will perform better looking forward over the coming years. There has been a heated debate in recent weeks about the old economy (more value) and the new economy (more growth) oriented stocks. I love technology in general, but it’s not cheap. Just look at Shopify that makes almost no money trading at 50x next year’s sales. Forget the forward P/E, at 1800x plus there is no logic there. I read a comment the other day that said investors were beginning to worry about valuation—give me a break!
Here is a chart between the NASDAQ 100 ETF and Berkshire Hathaway from 1999 (3/10/1999 – QQQ Inception) to 2002. The last time we saw this kind of divergence between old economy and new economy was at the market peak in 2000. Buffett is widely recognized as one of the best value managers of our era. But when the valuation of technology got ridiculous in 1999 into the March 2000 peak, Berkshire fell 40% while the NASDAQ 100 more than doubled.
The talk is beginning to develop that we could see another mean reversion where value starts to outperform. In this chart we look at the S&P 500 growth ETF (IVW) versus the S&P 500 value ETF (IVE) over the past decade. Value has underperformed growth by a whopping 45%.
Looking deeper into what factors are driving this adds great value. In our table, we have 3 comparisons. We compare the sector holdings of value (IVE) to growth (IVW) and we can see technology is 39% of growth while it’s 8.5% of value. Energy is 5.6% of value while it’s 0.65% of growth. Financials are 18% of value and 4.5% of growth. There are almost no utilities in the growth index 0.67% versus 6.6% for value. The only sector of the future (with meaningful size) in the value basket is healthcare. It’s double the size of the growth index.
IVE (value) vs. IVW (Growth) vs. IVW (2010)
The third column is the growth index 10 years ago. Technology has grown from 29% to over 39%. The new sector called communications services that includes GOOGL, FB, NFLX make up half the index and almost did not exist a decade ago. Almost the entire increase in consumer discretionary has been… you guessed it… AMZN! So is it growth, value or simply FAANGM stocks that are driving the markets.
The answer to the value or growth question is mostly about the new economy. It’s impossible to say what is expensive in a world of zero rates and no more price discovery because the market knows the Federal Reserve will have its back. So as we approach historic extreme valuations in growth versus value, some caution is clearly warranted, but I don’t see the end to money seeking growth industries compared to others that may be past their best before date (energy). Until we get off zero rates, don’t expect financials to lead any time soon either. Healthcare has growth potential, but buying that sector directly is the better way to go versus a broad value exposure.
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