The death of Value

Earlier this year (OK, yesterday) I mentioned Paul Scott’s comment about him seeing good value in small caps, assuming I haven’t misremembered what he said.

By coincidence, I came across an article by StarCapital from Nov 2019 on “The presumed end of the Value premium”.

They state:

Over the last five years, Value stocks have underperformed Growth stocks by an average of nearly 6% per year …the current drought belongs tothe 1% of the worst underperforming market periods in history
And importantly:
While European Growth stocks, for instance, have been valued on average 78% higher than Value stocks in former decades, this valuation premium has recently climbed to 156%. Only in spring 2000, immediately before the bursting of the dotcom bubble and before the beginning of one of the strongest value periods ever, the level of overvaluation of Growth companies was comparably high. Even then, in the wake of technological innovations, the idea of value investing seemed outdated
Their figure 6 is interesting. Of the top ten biggest companies of the decade, only about two will remain so in the next decade.  Only Microsoft made it for 3 straight decades.
So I’m increasingly favouring value, and might weigh that heavily into my decisions as to what to buy.
You might also like to take a look at the Stingy Investor site, which has been around for a long time, and has some interesting articles.
Stay safe out there.

Update 1: In Oct 2018, IBD posted an article stating that

Value stocks have underperformed so dramatically since 2010 that growth stocks now hold the upper hand over the past three decades

They warn that

Unlike during the dot-com bubble, growth stocks don’t look especially expensive relative to value. Thus, there’s no reason to expect a big reversal this time. … The P/E evidence indicates that growth stocks have earned their way to their success, rather than being buoyed by higher investor sentiment

I will conclude this update by noting that RDSA (Royal Dutch Shell), according to Stockopedia, is trading on a PE of 11.3, has a yield of 6.2%, and a P/FCF of 7.9. I think of a P/FCF<10 as offering excellent value. Given the political unrest between US and Iran, oil is expected to increase in price. I am therefore bullish on RDSA, and have some in my portfolio.

Update 2: There’s an article on abovethecanopy that offers the following statistic:

Over 5 year intervals value outperforms growth 75% of the time, and over 10 year periods 84% of the time.

Update 3: An article by CFA Institute from August 2018 offers a compelling explanation as to why  growth has beaten value over the last decade. The explanation is simple: after the banking crisis, value and growth stocks were trading at nearly the same earnings ratios. Growth stocks then went on to expand their earnings ahead of value (because that’s what growth stocks do). So naturally, growth stocks did better. The PE ratios were similar in 2017, but then diverged, with growth PEs rising, and those of value falling. Interesting, isn’t it? The graph only goes up to Jan 2018, and we don’t see the relative values as they stand now.

About mcturra2000

Computer programmer living in Scotland.
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1 Response to The death of Value

  1. seven says:

    Don’t I know it! I’ve primarily skewed toward investing in “value” since the early 1990’s. It has served me well over the long term, but the last 5 to 7 years have been difficult in that arena. My returns there have been well below the market. Fortunately, a fair amount of my portfolio is indexed, so it’s not all poor.

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