Will Growth or Value Stocks Dominate the Next Decade?

The debate between growth investors and value investors is as old as the stock market itself. However, in the eight years since the U.S. stock market bottomed during the financial crisis in 2009, the difference in performance between the two groups of stocks has been surprisingly lopsided.

Long-term investors must now decide whether there has been a fundamental shift in investor behavior away from value stocks and toward growth stocks or whether the pendulum will swing back the other way over the next eight to 10 years.

Value investors argue that the ultimate end game of any successful company is to deliver the highest possible profits. Value investors typically look for stocks with relatively low price-earnings ratios, consistent profits and stable positions in a durable markets.

Growth investors look for companies that are expanding revenue, gaining market share and building customer bases. Growth investors are typically willing to take on a bit more risk based on the potential that at some point in the long term, these high-growth companies will be able to turn their growth into profits and become value companies as well.

A perfect example of a value company is General Motors Co. (NYSE: GM). General Motors stock currently trades at a P/E ratio of about 7.2, much lower than the Standard & Poor’s 500 index’s ratio of 25.3. GM reported record profits of $9.7 billion in 2016, but the company has averaged just 4.7 percent revenue growth in the past four quarters.

Electric carmaker Tesla (TSLA), on the other hand, is a great example of a growth stock. Tesla has no P/E ratio because Tesla had no profit in fiscal 2016. In fact, the company reported a net earnings loss of more than $773 million on the year. However, growth investors ignore Tesla’s cash burn and focus on the company’s impressive revenue growth, which has averaged 65.7 percent in the past four quarters.

In terms of share price performance, Tesla and GM stocks are great examples of the outperformance of growth stocks in the current bull market. Over the past five years, the value-oriented General Motors stock is up about 84 percent. In that same time, the unprofitable, high-growth Tesla is up 1,080 percent.

A recent report from LPL Financial confirmed the widespread outperformance of growth stocks over the past 10 years. In fact, growth stocks outperformed value stocks by about 50 percent during that period. According to LPL, the past decade represents the longest period of outperformance by growth stocks in recorded history.

So far in 2017, that trend has shown no signs of slowing down. As of mid-September, growth stocks had gained 18 percent year-to-date compared to just a 4 percent gain for value stocks.

John Lynch, chief investment strategist for LPL Financial, says this type of extended outperformance will not last forever and long-term investors should position themselves accordingly.

“Though growth stocks have dramatically outperformed their value counterparts this year, we believe the tide is about to shift,” Lynch says. “The combination of steady economic growth, gradually tighter monetary policy, a potentially improved fiscal environment for business investment and attractive relative valuations suggest to us that value is well-positioned for outperformance in the coming year.”

However, not all analysts are convinced that the end of the growth era is imminent. Owen Murray, director of investments for Horizon Advisors, says growth stocks thrive when the overall U.S. economy is performing well.

“While nothing is certain, it is a possibility that growth stocks can continue to outperform, especially if the economy begins to pick up,” Murray says.

He also says there is good reason for the outperformance of growth stocks over the past decade. “Growth stocks were relatively undervalued compared to value stocks a decade ago, and that valuation gap has now closed completely.”

For long-term investors trying to choose between growth stocks and value stocks, Mike Loewengart, vice president of investment strategy at E-Trade, says Americans shouldn’t be afraid to invest in both value and growth.

“Given value stocks can lag growth stocks in sustained bull markets, it’s not surprising they have lost favor with some investors,” Loewengart says. “But uncertainty is the only certainty there is, and for patient investors, there is still a ton of upside to be found in value stocks for those willing to research.”

For both value investors frustrated with their relative underperformance and growth investors feeling like market geniuses, the period of growth stock outperformance, much like the bull market, will eventually come to an end. However, timing the market rotation from growth to value can be…

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