The Unprecedented Opportunity in Value Stocks

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Value investing is poised to dominate growth investing based on a historical comparison of valuation metrics. The gulf between the P/E ratios of value growth and growth stocks has never been this wide.

At the turn of the century, value investing was all the rage. From the peak of the bubble through 2006, its popularity was supported by academic research and such luminaries as Warren Buffett. Value investing indeed reigned supreme. Since then, however, its historic performance advantages vanished. After 13 years of lackluster performance, value investing seems like a relic of the past.

Since 2006, the relative outperformance of growth stocks over value stocks has been strong. In fact, growth has outperformed value by a whopping 140% on a cumulative basis when looking at the two broadest style benchmarks – as shown below. This is more than a 10% yearly advantage for growth stocks (or +7% compounded annually).

Taking a step back, value investing has historically dominated the broader universe – especially its pricier growth counterpart. The chart below shows the growth of $100 using Fama-French data where portfolios are based on companies that fall within earnings yield (earnings-to-price) ranges.

The value portfolio represents all stocks with the highest 30% of earnings yields (lowest P/E ratios). The growth portfolio represents all stocks with the lowest 30% of earnings yields (highest P/E ratios).