You can make a solid argument that the stock market is the greatest creator of wealth over the long term.
We've definitely witnessed a surge in home values since the 1990s, but the previous 100 years (1890-1990) saw home prices outpace the inflation rate by a paltry 0.21% per year, based on estimates from Robert Schiller via Irrational Exuberance. By comparison, inclusive of dividend reinvestment, the stock market tends to rise by about 7% per year, which is roughly double the rate of inflation between 1914 and 2014. Investing in the stock market arguably gives Americans their best chance of reaching their retirement goal and leaving the workforce at a time of their choosing.
The age-old debate: growth stocks vs. value stocks
However, the path by which an investor gets from Point A to Point B in the stock market has long been up for debate. There are easily more than a half-dozen investing strategies to choose from, but few get more credence than growth investing and value investing.
Growth investors are typically seeking companies that offer a superior growth rate relative to the overall stock market and perhaps their peers. Companies that are growing faster are often trendsetters, and presumably they should be able to keep up their superior growth for a long time to come. Companies with a high growth rate also have the potential to see their stock prices soar. The downside, as you might imagine, is that growth stocks aren't always making money, and the valuations of growth stocks can be prone to getting ahead of themselves because of emotional investing.
By comparison, value investors are seeking investments trading at a discount to the overall market or a sector in question. Value stocks usually have mature business models that seek to maintain strong pricing power, modest growth, and typically reward long-term shareholders with a dividend or stock repurchases. On the downside, value stocks can always get cheaper, because trying to time a low is a fruitless practice. Additionally, since value stocks usually have mature business, they don't offer the same eye-popping returns that can occasionally be seen with growth stocks.
"So which method is best over the long haul?" you wonder? That's exactly what Bank of America/Merrill Lynch sought to find out.
Over the long term, this investment strategy is the best
Based on the study findings from Bank of America/Merrill Lynch over a 90-year period, growth stocks returned an average of 12.6% annually since 1926. However, value stocks generated an average return of 17% per year over the same timeframe. Said Bank of America/Merrill Lynch chief investment strategist Michael Hartnett, "Value has outperformed Growth in roughly three out of every five years over this period."
Perhaps more interesting is that value stocks have tended to outperform during periods of economic growth, while growth stocks have proved better when the economy weakens or contracts. This would certainly help to explain why value stocks have left growth stocks in the dust, since the economy is expanding for a much longer period of time than it's contracting or stagnating.
Also worth noting is that we've seen a bit of a reversal to this trend since the end of the Great Recession. In other words, growth stocks have substantially outperformed value stocks despite the U.S. economy returning to growth. However, we've also witnessed historically low lending rates during this seven-year period, which has made access to capital cheaper than ever for growth stocks looking to hire, expand, and acquire competitors. As lending rates normalize in the years ahead, we're liable to see this divergence from the historic trend wane.
Value stocks to put on your radar
The great thing about value stocks is they come in all shapes and sizes and can be found in any sector. Here are a few names you'll probably want to consider adding to your radar or portfolio that could help put some extra pep in your step.
Among large-cap value stocks, Ford (F 3.84%) is one that's piquing my interest. Automakers, in general, aren't getting any love at the moment because there's worry on Wall Street that auto sales are nearing a peak within the U.S., and that, with China's GDP growth slowing, international sales are likely to face mounting pressure, too. With sales expected to grow at just 2% in 2016 and 2017, Ford's been stymied with a forward P/E of just 6.
Then again, Ford also has a long-tail growth opportunity in China, which is arguably just hitting the tip of the iceberg. As China's middle class grows and aims for simple luxuries, Ford's vehicles could be primed for increased success and market share.
Ford has also done wonders by courting a cost-conscious U.S. consumer. Ford's reasonable pricing, its focus on in-cabin luxuries such as infotainment systems, and its push to improve fuel efficiency with the introduction of the EcoBoost engine, have helped it maintain or grow its market share domestically.
A low P/E, a PEG ratio of 0.6, and a dividend yield of 4.6%, more than double that of the S&P 500, make Ford an attractive value stock worthy of your consideration.
Among mid-cap companies, a value stock I'd suggest investors gravitate toward is Juniper Networks (JNPR 1.48%), a provider of networking products and services.
The challenge for a company like Juniper is that its business struggles during low-growth or contractionary periods in the global economy. Juniper counts on continued enterprise investment in data centers and security firewalls to drive its growth, and if those investments aren't there, its growth rate slows. This is sort of what we're seeing right now with Juniper expected to report flat to ever-so-slightly lower year-over-year profits in 2016.
However, we have to remember that the global economy spends far more time expanding than contracting, which means the enterprise push into cloud-computing and data centers is going to move forward. The demand for routers, controllers, switches, security, and bandwidth services is only going to increase over time, which would appear to bode well for Juniper Networks.
Juniper also began translating its strong cash flow into rewards for long-term investors beginning in 2014 when it introduced a $0.10 quarterly dividend. Its payout of 1.7% isn't going to drop investors' jaws, but it became a nice feather in the cap for investors when compounded with the $2 billion share buyback announced in 2014.
A forward P/E of 10 and a PEG of 0.9 appear to be a reasonable price to pay for Juniper.
Among small-cap stocks, accessories retailer Movado Group (MOV 2.07%) comes to mind as a compelling value stock.
Movado's latest quarter certainly wasn't its best. In the first quarter of fiscal 2017 it recorded a 5% decline in year-over-year sales, and a 7% drop in adjusted EPS. Movado blamed weakness in bricks-and-mortar sales for the declines, and chose to invest more heavily in its online retail channels, which increased expenses and further cut into its full-year outlook.
However, Movado has a strong retail presence in timepieces, and as I've opined before, it sits in what I believe is the perfect niche pricing range. Movado's brand exudes luxury, but it's priced to be affordable to the middle-class consumer. It's an easily recognizable brand-name timepiece that allows consumers to feel fashion-forward without breaking their budget.
Movado, like most value stocks, is also generous when it comes to rewarding its investors. Its board recently authorized a $50 million share buyback following the completion of 1.86 million shares being repurchased in 2016, and it raised its quarterly payout by 18% to $0.13 per share. Movado's new payout of 2.7% is modestly ahead of the yield for the S&P 500.
To keep with our theme, Movado also has a sub-one PEG (0.8), and is trading at a reasonable forward P/E of just 11.
You can easily retire rich by investing in growth stocks based on an annual return rate of 12.6%, but the data suggests that investing in value stocks could get you to your retirement number even faster.