Growth vs. Value

Part of our daily research includes reviewing financial news that may impact our firm’s investment strategy. We recently came across an interesting article discussing the current disparity in relative valuation of growth stocks compared with value stocks (the link to the article can be found below). “Value” stocks are generally considered to be lower P/E, lower growth, higher-dividend paying stocks, while “growth” stocks are generally considered to be higher P/E, faster-growing companies that pay little or no dividend. The article notes that valuations for growth stocks are now quite low relative to historic relationship to value stocks (this is also supported by work from some of our other research sources).

So what’s the big deal about the valuation disparity of growth vs. value? Answer: the disparity may provide a strategic investment opportunity in favor of growth. Over the past several years, many investors have been favoring high-dividend, primarily large-cap stocks for obvious reasons: fear of volatility associated with smaller-cap stocks; an alternative to declining bond yields for those seeking income; reduced risk tolerance on the part of many investors. This has resulted in compression in valuations for growth relative to value and, hence, has led to the valuation disparity.

From a financial planning perspective, we advocate a diversified portfolio approach; we can and do adjust our allocations to growth and value based on relative valuations and relative performance; and we also seek the higher risk-adjusted returns. As an example of this, we recently changed our mid-cap equity exposure in favor of growth vs. value in order to capture what we believed is a valuation disparity noted above. Because mid-cap stocks are larger in market cap and, as a group, pay higher dividends than small cap stocks, favoring mid-cap stocks over small caps offers the benefit of both higher portfolio income and reduced portfolio volatility. At the same time, holding a diversified index of mid-cap growth stocks as part of a larger, well-diversified portfolio helps our clients achieve their long-term goals by capturing the return of this sector (which has significantly outperformed the S&P500 over the past 5 years) and thereby targeting a superior risk-adjusted return.

Link to article: http://finance.yahoo.com/video/sponsored-26302475/growth-stocks-are-a-coiled-spring-says-nuveen-s-mullinix-30110011.html#crsl=%252Fvideo%252Fsponsored-26302475%252Fgrowth-stocks-are-a-coiled-spring-says-nuveen-s-mullinix-30110011.html