Growth stocks regain favor after value's long run

Originally published Saturday, January 16, 2010 at 12:01 PM


Growth stocks regain favor after value's long run

Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.

The Associated Press

BOSTON — Growth is in, value is out. And it's likely to stay that way this year.

Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.

Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.

Typically growth stocks generate revenue and earnings at an above-average rate. Examples are Apple and Google.

Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.

Historical patterns

The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade.

Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.

That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.

"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."

In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.

Advantage holds up



That's because growth companies' competitive advantages — think of Google's search-engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy.

When the economy began to expand coming out of past recessions, value stocks began to rise faster than growth stocks, the study found.

But the market now is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.

But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.

"2010," Wood says, "will probably surprise us in how normal it will be."

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