Should You Invest In Growth or Value Stocks In 2023?
December 22 2022 - 06:03AM
The below graph perfectly sums up
the difference between growth and value investing. While Cathie
ARK Innovation ETF delivered stellar returns to shareholders amid
the pandemic, a majority of these stocks are now under the
Comparatively, Warren Buffett’s
portfolio of cash-generating blue-chip stocks have managed to hold their own
across market cycles.
During a bull run, high-flying
growth stocks tend to crush broader returns and derive outsized
gains for investors.
For instance, some of the top
holdings for the ARKK ETF include Tesla
(NASDAQ: TSLA), Roku (NASDAQ: ROKU),
and Shopify (NYSE:
SHOP). Between September 2017 (when Roku went
public) and December 2021:
Tesla UP 1,460%
Shopify UP 1,110%
Roku UP 871%
Alternatively, growth stocks
terribly underperform the markets when market sentiment turns
bearish as investors focus on companies with stronger fundamentals,
predictable cash flows, and robust balance sheets.
The triple whammy of rising
interest rates, supply chain disruptions, and surging inflation
numbers have dragged Tesla, Shopify, and Roku lower by 63%, 77%,
and 91% from all-time highs, respectively.
On the other hand,
Warren Buffett’s diversified portfolio has managed to perform
admirably amid the market chaos in 2022. While
Apple (NASDAQ: AAPL)
accounts for a majority of Berkshire Hathaway’s equity portfolio,
the Oracle of Omaha also has exposure to market leaders such
as Coca-Cola (NYSE:
Bank of America (NYSE:
Will value stocks continue to outperform growth stocks
According to historical data,
value investing has outpaced growth over the long term. This trend
has been observed across international equity markets, sectors, and
sizes. As seen here, the relative performance of the value index
has gained pace via a long-term downward trendline. It also
indicates the beginning of a “sustainable period of outperformance
for value stocks.
Typically, the performance of
stocks is tied to relative earnings growth. So, in a period of
economic expansion, growth stocks are well poised to accelerate
their bottom line due to multiple factors, including higher
consumer spending and lower bond yields. But as the economy
contracts, the market rewards companies that enjoy significant
pricing power and stable cash flows.
The value index comprises of
cyclical and defensive companies across sectors such as financials
and utilities, while the growth index consists of less cyclical
companies such as technology.
In 2022, value stocks have
delivered solid returns due to the outperformance in just two
sectors such as energy and materials. The Russia-Ukraine war has
driven the prices of oil and other commodities higher, resulting in
higher earnings for companies part of these
Most value stocks also pay
investors a dividend, and the reinvestment of these payouts has
been a major driver of the historical outperformance for value
investors. Right now, the Russell 1000 Value Index has a dividend
yield of over 2%, compared to the 1% yield of the Russell
1000 Growth Index.
What percent of the S&P 500 index is growth vs.
The S&P 500 does not break
down stocks into categories such as growth and value. But
growth-oriented sectors such as technology and consumer
discretionary account for 40% of the index, while financials,
energy, consumer staples, and industrials account for 29% of the
The division to invest in growth
or value stocks depends on the individual investorU+02019s
preference. You must consider multiple factors, such as risk
tolerance, investment horizon, and financial
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