Value has outperformed growth for the first nine months of the year, but the picture has been complicated because there have been multiple style rotations along the way. Dividing stocks into value, GARP (growth at a reasonable price), and hyper-growth baskets clarifies the pictures enormously because it shows that value and GARP have actually tracked each other with the exception of diverging performance in late April, while hyper-growth stocks have been all over the place.
“After the significant rotation out of growth and into value that occurred in March and April, growth is now back in vogue,” write Credit Suisse analysts David Rones and Greg Williamson in a September report. “Much of the weakness in growth names was attributed to ‘hyper’ growth stocks with the highest growth expectations. These same names have led the comeback in growth stocks since the beginning of May.”
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Relative implied discount rates favors large US growth stocks and Japanese value
Rones and Williamson argue that US large cap growth stocks are starting to look more attractive than value because the difference in implied discount rates is at the lowest point since 2010 and wouldn’t have to drop much lower to hit a 20-year low. Small cap US stocks are another story, with growth and value trading in their typical historical range.
Implied discount rates also signal that growth stocks may be a better deal in Europe and Asia ex-Japan, where the difference is at the low end of the historical range, though nowhere near as extreme as in US large caps.
Rones and Williamson argue that Japanese value stocks are cheap relative to growth right now, with difference in implied discount rates breaking out of the historical range, and EM value stocks are attractive as well.
Huge swings in hyper-growth prices demonstrates why value investors avoid them
Without focusing too much on value’s outperformance so far this year, the huge swings in hyper-growth stock valuations is both what you would expect and a good argument for avoiding them in the first place. When a stock’s valuation is based almost entirely on future hopes, it’s easy for the news cycle to knock prices up and down even when fundamentals haven’t much changed. If you don’t believe that market timing is a dependable investment strategy, the hyper-growth roller coaster doesn’t look very appealing.