Value vs. Glamour Stocks: A Long-Term Worldwide Perspective by Brandes Institute
- Over the long term, value stocks delivered better results than glamour stocks.
- Value outperformance, or the value premium, was evident across different valuation measures, including price-to-book, price-to-earnings and price-to-cash flow ratios.
- The value premium was also evident in different regions and among large- and small-cap stocks.
In this updated “Value vs. Glamour” study, the Brandes Institute set out to further explore the historical performance of stocks based on their fundamental characteristics. Consistent with the work of noted academics, our results showed that over the long term, unpopular value stocks outperformed their more popular glamour counterparts. In other words, the value premium was evident.
Value stocks are often associated with companies experiencing hard times, operating in mature industries or facing adverse circumstances, while glamour stocks are typically affiliated with fast-growing companies, often from dynamic industries with a relatively high profile.
In our last study from 2012, we examined the returns for both U.S. and non-U.S. stocks, and found that the value premium was evident across valuation metrics, geography and market capitalizations. In this update, we expanded the study through 2014, including the remarkable upturn of U.S. stocks and the volatile trajectory of emerging-market equities over the past couple of years.
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Using data from 1980-2014, our study showed that over the long term, the value premium was evident across valuation metrics, regions and market capitalizations.
In Exhibit 1, on the following page, we subtracted the returns of decile 1 glamour stocks from the returns of decile 10 value stocks. The chart illustrates that value stocks outperformed glamour in all segments, with a regional perspective displaying the biggest return discrepancies. The value premium in emerging markets was triple the premium in the United States and almost double that in non-U.S. developed markets as measured by their price-to-book ratios.
Exhibit 2 provides a closer look into how value and glamour stocks performed year over year in the United States, non-U.S. developed markets and emerging markets. Using the same approach of subtracting decile 1 returns from decile 10 returns, the chart shows that while value stocks had periods of underperformance, such as in 2011 and 2012, over the long term they outperformed glamour stocks in more periods and in longer stretches.
Background and Methodology Introduction
In their 1934 book Security Analysis, Benjamin Graham and David Dodd argued that out-of-favor stocks were sometimes underpriced in the marketplace, and that investors cognizant of this phenomenon could capture strong returns. Conversely, the duo theorized, prices for widely popular stocks often were buttressed by high expectations and could be vulnerable if these expectations proved too enthusiastic.
The philosophy espoused by Graham and Dodd is now widely known as value investing, and the unpopular value stocks they advocated often are associated with companies experiencing hard times, operating in mature industries, or facing similarly adverse circumstances. Alternatively, typically fastgrowing glamour companies frequently function in dynamic industries with a relatively high profile.
This stark contrast in attributes leads to a natural question: which stocks have performed better, value or glamour?
While this is not a simple inquiry, we believe historical analysis may shed light on the relative performance of value stocks and glamour stocks—largely because their divergent traits often manifest in their respective valuation metrics. Specifically, value shares typically feature low price-to-book (P/B), priceto-earnings (P/E), or price-to-cash flow (P/CF) ratios, while glamour stocks generally are characterized by valuation metrics at the opposite end of the spectrum. As a result, these metrics can be used to split a sample of equities into either the value or the glamour camp—and subsequently track each group’s performance over time.
This approach to the value vs. glamour question is not novel. As early as 1977, academic studies used share-price and earnings-per-share data to classify stocks into the value or glamour categories and compare historical performance. Through the 1980s, 1990s, and 2000s, additional studies broadened the analysis to include book-value and cash-flow metrics.
In 1994, academics Josef Lakonishok, Andrei Shleifer, and Robert Vishny (LSV) published “Contrarian Investment, Extrapolation, and Risk,” a seminal entry in the value vs. glamour canon. Using data from 1968 through 1994, LSV classified U.S. stocks as value or glamour based on their P/B, P/CF, and P/E ratios, as well as their sales growth. The researchers concluded that, for a broad range of definitions, value stocks consistently outperformed glamour stocks by wide margins.
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