One of the oldest debates in investment management is the wisdom of purchasing growth versus value stocks. While there is no precise definition of either approach, growth stock investors generally focus on companies enjoying above average growth in earnings while value proponents favor those selling at low P/E ratios. As shown in the inset in the following chart, these approaches delivered fairly similar returns over the 1979-2024 period with growth achieving an annual return of 12.2% versus 11.5% for value. However, growth versus value performance tends to alternate in cycles of various length. In this chart, value is outperforming when the line rises and vice versa. The extraordinary takeaway is the utter dominance of growth stocks from 2006 onward. Not surprisingly, cheaper stocks (Value) outperformed briefly during 2021 and 2022 when the overall stock market was weak. However, even including that period, the overall divergence is amazing. From December of 2006 through today, growth stocks delivered an annual return of 13.4% versus 7.9% for lower P/E stocks.
This is a great example of one of the difficulties in investing which is determining whether an extreme variance from historical behavior is simply an aberration that will eventually reverse or what investors call a paradigm shift. In this case, the large growth stocks tend to be dominant brands that are extremely profitable and growing at very high rates. However, they are also selling at a significant P/E premium to the stock market as a whole. Tough call!