Why Value Stocks Are Beating Growth Stocks

With the S&P 500 (SNPINDEX: ^GSPC  ) having hit new all-time record highs on Friday, it's a good time to take a look back and see where the index's most recent gains have come from. Somewhat surprisingly, value stocks appear to be taking the lead in pushing the overall market higher, while growth stocks have lagged behind somewhat. Let's take a closer look at the trend and see if we can come up with a good explanation.

Value's ahead of growth
Standard & Poor's is kind enough to calculate its own growth and value indexes. It takes the companies in the S&P 500 and looks at growth factors like revenue and earnings growth as well as share-price momentum, as well as value factors including ratios of stock price to book value, earnings, and revenue. After ranking the stocks, S&P divides them into three categories, with a third of stocks going solely into the value basket and another third going into the growth basket. The middle third combines elements of both and are thus included in both indexes, but with weightings that reflect their respective growth and value attributes.

As you can see from looking at the iShares ETFs that cover the two sets of stocks in the S&P 500, over the past year, value has beaten out growth.

IVV Total Return Price Chart

S&P 500 Total Return Price data by YCharts

With a better than five-percentage-point advantage, value has clearly done exceedingly well. What's behind that outperformance?

As it happens, probably the biggest contributor to growth's troubles is Apple (NASDAQ: AAPL  ) . With declines of 15% so far this year despite its big rebound more recently, Apple has a huge weighting of about 5.7% as a pure growth stock. In fact, it's the only stock in growth ETF's top 25 holdings that has posted declines for 2013.

Surprisingly, defensive stocks aren't really contributing to value's dominance, in part because many of those stocks no longer qualify as pure value stocks according to S&P's methodology. Johnson & Johnson (NYSE: JNJ  ) and Procter & Gamble (NYSE: PG  ) appear in both indexes, with J&J actually having a greater weight in the growth ETF than in the value ETF. The reason: investors have bid those companies' stocks up so far that their P/E ratios and other valuation measures no longer resemble value stocks. Rather, financial stocks have taken over the lead as top vale prospects, with AIG (NYSE: AIG  ) and major Wall Street banks having become pure value plays once again.

Find value wherever you can
Value and growth stocks tend to move in and out of favor over time, so there's no one right answer as to which strategy is best. Rather, choosing value or growth is more of a personal investing preference, and ideally, keeping both as viable options can be your best chance to maximize your most promising investment opportunities.

Value stock or growth stock, Apple raises a huge amount of debate. Find out whether Apple remains a buy by looking at Motley Fool senior technology analyst and managing bureau chief Eric Bleeker and his latest premium research on the company. Eric's prepared to fill you in on reasons to buy and reasons to sell Apple and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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Comments from our Foolish Readers

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  • Report this Comment On May 05, 2013, at 4:10 PM, foolishfollies wrote:

    AIG doesn't seem to get much respect from the Motley fool caps community. 3 stars is hardly a stellar rating. And that is fine. Truth is I respect Motley fool and what they do. You hear so much negative on the financial message boards about how MF comes out one day with a positive on a specific stock, and the very next day they post a negative. I try to explain to them that MF bloggers are a diverse group who don't always see things eye to eye. And you have to look at MF "the company" separately from MF "the bloggers".

    And although I have got some really good picks from MF subscription in the past (ISRG at 90/Sh), I am going with the hedge funds in the future, especially when the amount of conviction is as high as it is with SO MANY large hedge funds on AIG.

    We have 145 large hedge funds owning AIG, making it number one as pointed out in many Motley fool articles. But what I feel is even more impressive is the 7 large hedge funds that hold AIG at 19% or greater of their entire portfolio. This is from the 13F's filed as on the beginning of the year and could have changed. But I would bet it has only increased, not decreased.

    Have a nice day. (Source Insidermonkey)

  • Report this Comment On May 06, 2013, at 4:52 AM, FelixCaliferous wrote:

    Defense, value, and dividends are beating bonds.

    All those funds that flowed into bonds since 2008 are now coming into play. Let's see how long Bernanke wants this game to continue.

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