Growth stocks have materially outperformed value in recent years. The above chart shows rolling, cumulative 3 year returns for the Russell 1000 Growth Index vs the Russell 1000 Value Index.
The dispersion of valuations among individual companies has also widened dramatically. Expensive stocks have become relatively more expensive and cheap stocks have become relatively cheaper. FAANG, software and emerging growth companies (such as Beyond Meat) have captivated the investing public’s attention. Many lower growth businesses have underperformed (note: so-called "low volatility" stocks have been an exception, and are often both low growth and expensive). For a CNBC story on valuation dispersion from earlier in the year click here.
I find that such market conditions – with outsized moves in relative valuation - create a target-rich environment for active managers. Great businesses are generally fully (or over) valued. Those facing challenges are often trading at significant discounts. The hard part, of course, is figuring out which businesses have temporary/solvable challenges and which are truly broken.
I am not trying to pick a short-term inflection point between growth and value. Rather, as I look at individual companies from the bottom up, I believe that the long-term risk/return is more attractive in many of the less expensive boring/value names left behind. I have been selling “great” businesses at high valuations and buying “good” businesses at reasonable or cheap valuations.
I will continue to post on this topic…
