Growth Stocks or Value Stocks?

The financial markets have made a sharp style reversal in the first quarter of 2016. If you compare growth stocks to value stocks, growth has been on a run since 1999 and in 2015 large cap growth outpaced large cap value by 9.5%! So if an investor had any ‘lean’ into large cap value, they didn’t have a great year last year. Fortunately, Caissa was leaning heavily into the growth style for the past few years and it has paid off.

Growth Stocks or Value Stocks?

The financial markets have made a sharp style reversal in the first quarter of 2016. If you compare growth stocks to value stocks, growth has been on a run since 1999 and in 2015 large cap growth outpaced large cap value by 9.5%! So if an investor had any ‘lean’ into large cap value, they didn’t have a great year last year. Fortunately, Caissa was leaning heavily into the growth style for the past few years and it has paid off.

What is a growth stock? It is a stock that is typically associated with companies that have earnings that are growing and you want to buy it for its future cash flows. Growth stocks are names like Nike, Facebook, Apple and Microsoft.

A value stock, on the other hand, is better defined as a company with flattening earnings growth rates and a low P/E ratio. Value stocks are names like Walmart, Wells Fargo & Co and Exxon Mobil Corp. As of late, especially in 2015, many energy and materials names were what dragged down value stocks. However, the recent surge in oil prices has kicked off a first quarter in 2016 that have widely favored value stocks to growth stocks. Value has outperformed by at least 2.3% in the first quarter alone. Value stocks like an environment where oil is rising, the economy is expanding and the fed is very dovish on interest rates (slower to hike).

Caissa has a lean into growth stocks right now and we haven’t yet offset that. One supporting item in the cause for not making a huge style shift is that the P/E ratio of growth stocks currently is 19.5 vs it’s 20 year average of 21.1. Some would argue there is a bit of room to run there. Whereas the current P/E for value stocks is 16.3 and the 20-year average is 14.3 so some would say that value is a little overheated for the price and the earnings you get for paying up.

This style rotation has been playing out not just in large caps, but in small and mid caps as well. In addition, we see the P/E ratios in value stocks for mid and small caps also exceeding their 20-year averages while the growth stocks remain below their 20-year averages for P/E ratios.

Therefore, while the underweight of value was a large drag to us in the first quarter, we still believe there is room to run in the growth stock and will remain overweight there. This is yet another reminder that we have to remain allocated across all asset classes, styles and sectors as they can rotate in and out rather quickly!

Caissa Wealth Strategies is a fee based registered investment advisory firm, specializing in personal, dynamic wealth management. Based in Bloomington, Minnesota, Caissa financial planning professionals provide individualized strategies for every client. You can expect more from CAISSA, and in turn, you will get a fiercely loyal advocate on your side. For more news and information on wealth management solutions, visit Caissa Wealth.