Which performed better in recent years, growth stocks or value stocks? Differentiating between these characteristics is a popular way to segment the US stock market (next to segmentation by market capitalization). Value stocks can be roughly described as bargains. These stocks are usually associated with low P/E, low P/B, low price/cash flow, and a high dividend yield. Growth stocks are the exact opposite. They are considered expensive measured by a variety of metrics. These stocks generally do not pay dividends, as the companies usually want to reinvest any earnings in order to keep growing at certain rates.
Value and growth investing are opposing strategies. A stock prized by a value investor might be considered worthless by a growth investor and vice versa. Value investors seek to profit as the price returns to its “fair value while growth investors are looking for winners and focus on competitive advantages.
The ratio in the chart above divides the Wilshire US Large-Cap Growth Index by the Wilshire US Large-Cap Value Index. When the ratio rises, growth stocks outperform value stocks - and when it falls, value stocks outperform growth stocks. The ratio peaked in 2000, during the dot-com mania.
- Federal Reserve Bank of St. Louis: Wilshire US Large-Cap Growth Total Market Index
- Federal Reserve Bank of St. Louis: Wilshire US Large-Cap Value Total Market Index
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