Growth And Value Labels Help Highlight Winners

3/27/2017


We believe in keeping our selection universe as broad as possible, so we never limit ourselves to either growth or value stocks. But we also believe in using history to tilt the odds in our favor, and growth and value labels can be useful for that purpose.

For the broad Dow Jones U.S. Index, stocks are categorized as growth, value, or neutral. The 486 growth stocks tend to have higher valuations and growth rates, especially compared to the 562 value stocks. The 183 neutral stocks fall somewhere in the middle, often with a mix of growth and value characteristics.

WHAT WORKS WITH GROWTH, VALUE, & NEUTRAL STOCKS
Average 12-Month Outperformance Of Top One Fifth Based On Quadrix Score For:
Overall
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
GROWTH STOCKS
Since Jan. 1992
3.4
1.4
2.9
0.9
1.1
0.5
2.9
Last 5 years
0.8
(0.2)
(0.8)
(0.7)
(1.1)
0.9
0.5
VALUE STOCKS
Since Jan. 1992
1.4
0.4
2.5
(0.3)
(1.2)
0.2
(0.6)
Last 5 years
0.7
0.5
1.7
(1.3)
(2.5)
0.4
(1.3)
NEUTRAL STOCKS
Since Jan. 1992
0.8
(0.3)
1.6
(1.0)
(0.6)
1.1
1.2
Last 5 years
(1.3)
(2.4)
(5.2)
(3.3)
(2.0)
1.7
0.6

Using rolling 12-month periods since 1992, we looked at what stock-picking factors worked best for these three sets of stocks. Among our findings:

• With growth stocks, Overall Quadrix scores work better than any of the six Quadrix category scores, though Value and Performance have worked well since 1992. Over the last five years, the Value score has not worked, while Overall and Performance have worked modestly. Among individual variables, the enterprise ratio (EBITDA divided by the sum of debt and equity, less cash) and the price/free-cash-flow ratio have been among the best.

• With value stocks, the Value score has been the most effective category score by far. Buying value stocks with good Quality and Financial Strength scores has been a losing proposition. The Overall score has worked since 1992 and over past five years, but not as well as the Value score. The price/sales ratio has been the best individual variable, working nicely since 1992 and over the past five and 10 years.

• With the relatively small universe of neutral stocks, the Earnings Estimates score has been among the most consistently effective scores since its introduction in 2004. The Overall and Value scores have struggled with neutral stocks in recent years.

• On average, growth stocks are cheaper than normal relative to value stocks. The average Quadrix Value score is 48 for growth stocks, above the norm of 43 since 1992. Among value stocks, the average Quadrix Value score is 59, below the norm of 65. On average, growth stocks trade at 26 times trailing earnings, roughly equal to the norm since 1992. Value stocks have a trailing P/E of 21, about 20% above the norm of 18.

• Sales and earnings growth has rebounded for both growth and value stocks, with average growth rates for both improving in the last two quarters. But growth stocks are still not growing like they once did; average sales growth in the most recent quarter was nearly 9%, below the norm of 10% since 1992. Value stocks reported about 3% sales growth in the most recent quarter, in line with the norm.

• Things change. Since 1992, long-term expected profit growth has been a strong performer, ranking among the best stock-picking variables for growth, value, and neutral stocks. But this variable has not worked over the past 10 or five years, as shares of companies with the fastest expected growth have underperformed consistently.

• In general, Quadrix works better with growth stocks, as the table above shows. But we found three stocks in growth, value, and neutral that score well for variables that have a history of working in their style segment. The nine stocks, all with superior year-ahead potential, are listed in the table above.

NINE PICKS IN 3 STYLES

GROWTH
F5 Networks ($146; FFIV)
Lam Research($125; LRCX)
Mohawk Industries ($228; MHK)

VALUE
D.H. Horton ($33; DHI)
Lear ($138; LEA)
Owens Corning ($61; OC)

NEUTRAL
Alaska Air ($93; ALK)
Carnival ($58; CCL)
Comcast ($37; CMCSa)


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