Our Perspective on Growth vs. Value
Last week’s Barron’s cover story asked whether U.S. value stocks are primed to break out of their “funk” after 10 years of underperformance vs. growth stocks.
Included in the case for value is a standard definition of value investing: “At its most basic, it’s buying stocks that are cheap and holding them until the rest of the market realizes these great companies are selling at a bargain price, and pile in, driving prices up.”
Such an argument separates growth and value equities by stock price while overlooking a fundamental difference between the two. We base this on our perspective on international growth and value stocks.
Many of the “growth” companies that dominate growth indexes/portfolios and look more “expensive” are actually the winners of secular changes that have occurred while value indices/portfolios are littered with casualties of the change.
For us, growth vs. value—as they are often defined rigidly and simplistically in benchmarks—is not a binary choice. We prefer to think of growth and value in concert, as we invest in businesses with compelling growth fundamentals that support the ability to compound intrinsic value over time. This is fundamental to our approach to finding the best growth businesses and understanding the path to intrinsic value creation.
Technology Spending Skews P/E
Our team believes that conventional valuation metrics like P/E may not be appropriate in measuring value in an increasing number of instances.
The application of tremendous innovations in technology to a variety of industries is disruptive. There are companies that have and continue to invest heavily to build scale, in internet retail, media, financial services, advertising and cloud computing, among other areas.
This spending often isn’t accounted for properly as an investment (something we try to address with our economic profit-based approach) so it reduces current reported earnings and increases the P/E in some cases to levels well beyond the comfort zone of traditional value investors. But those investments are helping build scale and other competitive advantages that increase the longer-term cash generation capacity of the business—which results in growing intrinsic values.