One of my favorite analytical techniques involves slicing and dicing the Fool's universe of recommendations and scanning the results for emergent trends. That's step one. Step two involves comparing those patterns with developments in the economy, the broader universe of stocks, and the market's history.
A clear trend right now: Growth as value, especially among the market's little fish.
The ranks of our highest-conviction ideas, for example, include a heaping helping of small- and mid-cap growth companies, particularly when we further winnow that hit list to just those that have earned five-star status from our CAPS community.
Bringing it all together
As Freud once reportedly said, there are no accidents. Small-cap stocks have led the way out of seven of the last nine recessions when judged by one-year trailing returns. It's eight of nine using three-year numbers. And while small-cap value stocks have frequently won out, current market dynamics suggest that trend may be comparatively muted this time around.
That's because, in the aggregate, small-cap growth investors currently pay just a modest valuation premium relative to their value-focused rivals, notwithstanding the chasmwide spreads that exist between the two groups in terms of earnings, sales, and cash-flow growth.
Buy growth on the cheap
To illustrate, that valuation dynamic in action, consider the profile of Vanguard Small-Cap Value (VBR), an ETF whose top holdings include fallen angel (falling knife?) AIG (NYSE:AIG) and Gannett (NYSE:GCI) -- a pair of companies trading at significant discounts to well-heeled industry rivals Travelers (NYSE:TRV) and Washington Post (NYSE:WPO). And yet ...
The Vanguard ETF, however, sports only a modest discount to its more growth-oriented competition. For example, iShares S&P Small Cap 600 Growth (IJT) -- which provides exposure to racy little fish like Blue Nile (NASDAQ:NILE), J2 Global Communications (NASDAQ:JCOM), and Buffalo Wild Wings (NASDAQ:BWLD) -- runs with a forward P/E of roughly 18 while the Vanguard value play hovers close to 16.
That's a particularly narrow P/E spread given that the iShares portfolio boasts vastly superior historical earnings and sales-growth track records. Then too, while you might expect a bumpier ride with growth stocks, the iShares ETF has actually been less volatile than the Vanguard fund over the last three years.
Translation: Now appears to be a promising time to buy growth on the cheap. Indeed, these days, growth may be the new value.
The Foolish bottom line
Make no mistake: We Fools come to our conclusions through bottom-up, brick-by-brick vetting, and fundamental tire-kicking. Market history, after all, doesn't always repeat. That said, bringing historical insights and an awareness of current market conditions to bear is an especially smart move if you're doing so upon a group of stocks that have been scoured for fundamental strength. Indeed, to my way of thinking, it's the best of both analytical worlds.
With that in mind, here's a next step for your consideration: Take the Fool's flagship small-cap service -- Motley Fool Hidden Gems-- for a completely free test drive. Click here for a 30 days of unfettered access to the service's complete list of recommendations. If history is any guide, small-caps should lead the way as the Great Recession recedes, and even if you opt out, the service's insights and ideas yours to keep.
Shannon Zimmerman runs point on the Fool's Duke Street and Ready Made Millionaire services, and he runs off at the mouth each week on Motley Fool Money, the Fool's fast 'n' furious podcast. Shannon and the Fool own shares of Vanguard Small-Cap Value. Buffalo Wild Wings is a Hidden Gems recommendation. Blue Nile is a Rule Breakers selection. You can check out the Fool's strict disclosure policy right here.
