Growth Is Crushing Value Right Now, but Remember to Take a Long-Term Horizon

Growth Is Crushing Value Right Now, but Remember to Take a Long-Term Horizon

Investors are betting on growth stocks over value stocks by a wider spread right now than at any other time since at least 1990, including during the tech bubble.

The ratio between the Russell 1000 Growth Index and Russell 1000 Value Index reached a series high of 1.70 on May 15. That’s above the previous record of 1.68 set in March 2000, when the market peaked before plunging 50 percent.

Ratio between growth and value stocks now wider than during tech bubble
click to enlarge

Here’s another way to look at it: So far this year, growth stocks are up 1.8 percent through May 27. Meanwhile, value stocks are still down more than 16.2 percent.

What this suggests to me is that investors are seeking companies that are forecasting faster-than-average profits in an effort to recoup the losses they may have seen between February 19 and March 23 of this year.

As the name implies, growth companies are those that may be growing at a faster rate than the overall market. Although there are exceptions, they tend to have lower dividend yields than value stocks because they’re reinvesting their current revenue toward expanding their businesses. Growth names can appear in any sector or industry, but they’re more prevalent in biotechnology, data processing, health care equipment and other cutting-edge industries.

Value stocks, on the other hand, are those that appear to be undervalued relative to their peers. They often have attractive dividend yields and low price-to-earnings (P/E) ratios. Growth stocks currently have a very high P/E ratio of 29.36, whereas value stocks look more affordable at 16.38. Think banks, energy and utilities.