Stock investors have long debated the merits of growth investing versus value investing. In recent years, growth stocks like Apple and Nvidia have been the clear winners, outperforming their value counterparts. However, many believe that value investing will have its time to shine once again, even though that day has been eagerly anticipated for quite some time.
Here’s what experts in the investing world have to say about growth and value investing, and when we might see value investing make a comeback.
Differences between growth investing and value investing
The distinction between growth and value investing may seem arbitrary to some, but it’s important to understand the key differences between these two approaches.
Growth investing
Growth investors seek out stocks that have the potential to double in value in a few years if the company continues to grow rapidly. The success of their investment hinges on the company’s growth trajectory and the market’s willingness to pay a premium for growth stocks, as indicated by metrics like the P/E ratio.
Growth stocks are often referred to as momentum stocks, as their upward momentum attracts more investors. However, this momentum can sometimes be driven more by market hype than the company’s fundamentals. When reality fails to meet expectations, a growth stock can experience a significant drop in value.
Value investing
In contrast, value investors look for stocks that are currently undervalued based on their intrinsic worth. They target stocks that are out of favor with the market and therefore have a low valuation, betting on a future increase in the stock price as market sentiment improves.
“Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return,” explains Wes Crill, senior investment director at Dimensional Fund Advisors.
While value investors like Warren Buffett have achieved great success, there are also wealthy individuals who favor growth stocks, such as Jeff Bezos and Bill Ackman. The distinction between growth and value investing extends beyond valuation metrics, as highlighted in the table below.
| Trait | Growth investing | Value investing |
|---|---|---|
| Company features | Rapid growth, innovative products, tech focus | Stable growth or stagnation, established products |
| Valuation (P/E ratio) | Higher | Lower |
| Stock popularity | In favor, driven by momentum | Out of favor, overlooked by the market |
| Dividends | Less common | More common |
| Stereotypical stock | Amazon, Apple, Nvidia | Procter & Gamble, Exxon Mobil, Johnson & Johnson |
| Volatility | Higher | Lower |
While the distinction between growth and value investing is clear, there are instances where the lines between the two blur. Some growth stocks may be undervalued, while certain value stocks may exhibit growth potential.
Ultimately, both growth and value investors aim to invest in stocks that will appreciate in value over time. Both growth and value companies have the potential for growth, making them attractive long-term investments.
“When the markets are greedy, growth investors tend to thrive, while value investors excel in times of fear,” notes Blair Silverberg, CEO of Hum Capital.
However, Silverberg acknowledges that the current market landscape is different, with technology companies presenting valuable opportunities at fair prices.
The distinction between growth and value investing can also be influenced by psychological factors.
“The market often overlooks the earnings growth potential of a company simply because it’s classified as a value stock,” says Nathan Rex, chief investment officer at Eigenvector Capital.
Which is better: Growth investing or value investing?
The superiority of one investing style over the other depends on various factors, as each approach may perform better under different economic conditions. While growth stocks may thrive in low-interest rate environments, value stocks could gain favor as interest rates rise. While growth stocks have dominated the market in recent years, value stocks have a strong long-term track record.
Growth stocks continue to outperform
Over the past decade, growth stocks have enjoyed significant success, driven by tech giants like Meta Platforms, Alphabet, and Amazon. These tech stocks, often referred to as the Magnificent 7, have become major players in key market indexes.
According to Vanguard, U.S. growth stocks outperformed U.S. value stocks by an average of 7.8 percent per year in the decade leading up to April 2023.
The rise of growth stocks can be attributed to investors’ willingness to pay a premium for future growth prospects in a low-growth economy, explains Nathan Rex.
Jeff Weniger of WisdomTree Investments points to the tech and communications services sectors as beneficiaries of the growth trend, while noting the struggles faced by energy and financial stocks, typically associated with value investing.
Low interest rates have also contributed to the appeal of growth stocks, as investors are more willing to overlook current profitability concerns in favor of future growth potential.
Norm Conley of JAG Capital Management highlights the challenges faced by traditional banks in a low-rate environment, further underscoring the difficulties encountered by value stocks during this period of technological disruption.
While there was a brief shift in the growth vs. value dynamic in 2023 and 2023 due to rising interest rates, the resurgence of growth and tech stocks in 2024 indicates a return to favor for growth-oriented investments.
Value investing tends to outperform over the long term
While growth stocks may dominate in the short term, historical data suggests that value stocks have the upper hand in the long run. According to Dr. Robert Johnson, value stocks have outperformed growth stocks in 93 percent of rolling 15-year periods from 1927 to 2019.
However, over shorter periods, value stocks may outperform at a lower rate, with annual data showing value outperforming in 62 percent of cases.
It’s important to distinguish between value stocks with temporary setbacks and those with fundamental issues that may hinder long-term performance, notes Norm Conley.
Both value and growth investors face the risk of investing in overvalued stocks that may underperform in the future, emphasizes Conley.
When might value begin outperforming growth again?
Investors are eager to know when value stocks will reclaim the spotlight from growth stocks. Following a brief resurgence in 2023, value stocks have once again taken a backseat to growth stocks, signaling a preference shift among investors. Several factors could influence the resurgence of value investing.
Inflation is a key factor to watch, as it tends to benefit value stocks more than growth stocks. While inflation spiked in 2023, recent reports show a decline to 2.9 percent as of July 2024.
Traditional value sectors like energy and finance performed well amidst rising energy prices and inflation, leading to increased interest in these stocks. However, experts suggest that value stocks may see a resurgence as interest rates fluctuate.
Long-term studies indicate that the market eventually reevaluates and revalues value stocks, making them potentially attractive investments in the future.
“Our research shows that value investing remains a reliable strategy for enhancing expected returns over time,” says Wes Crill. He emphasizes the importance of staying invested for the long term, as historical data suggests that value stocks tend to outperform in clusters.
A market correction or bear market could also favor value stocks, as their lower valuation cushions them from severe downturns compared to high-flying growth stocks.
“Bull market leaders often become bear market laggards, so a market downturn could propel undervalued value stocks to outperform, similar to the period from 2000 to 2002,” explains Jeff Weniger.
Bottom line
The debate between growth and value investing will persist, but evidence suggests that value stocks have the edge over the long term, despite growth stocks dominating headlines. Whether investing in individual stocks or index funds, it’s essential for investors to adhere to fundamental investing principles to mitigate risk and maximize returns.
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