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Sound Advice: February 16, 2022

Is It Time For Value Stocks? 

Although there are many different types of stocks, whether they are U.S. or international, most tend to fall into one of two main groups: growth and value.  Growth stocks are those of companies with profits increasing at above average rates and they typically sell at higher valuations.  Value stocks are those of companies growing more slowly, often not consistently, and their shares tend to have lower valuations.

Some examples of growth stocks: Amazon, Netflix, Google, and Apple.  Some examples of value stocks: Procter & Gamble, Johnson & Johnson, and Berkshire Hathaway.

Valuations demonstrate the confidence that investors have in companies.  The traditional yardstick is a multiple of a company’s net profits.  For the stock market as a whole, historical valuations have typically been in the range of 15 to 18 times, though there have been periods such as the mid-1970s when valuations fell to the high single digits.  The flip side was the dot.com era when for a short time valuations doubled the norm.

For a slow-growing company these days, the multiple may be between 10 and 15 times profits.  A fast-growing company may get a multiple that’s twice as high.

When the economy is gaining momentum, inflation is tame, and interest rates are falling, investors tend to favor growth companies.  At the moment, inflation is way above normal, interest rates are en route to higher levels, and the economy is doing well, but there are continuing labor shortages and supply problems.  So the pendulum of investor interest may soon start to swing in the opposite direction.

After an extended period following the banking crisis of 2008-9, growth stocks have shined while value stocks have festered.  As a result, the disparity between the returns of growth stocks and value stocks has increased to the widest point in nearly three decades. 

 

Although this pattern may continue a bit longer, January’s market turbulence could well be a prelude to investors shifting to value stocks. 

N. Russell Wayne, CFP

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com 

Any questions?  Please contact me at nrwayne@soundasset.com

 

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