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Why Value Still Beats Growth


Value stocks have been on a five-year roll, gaining an annualized 7.4% since 1999, vs. a loss of 3.8% for growth stocks. Can the trend continue? Eileen Rominger, chief investment officer for the value team at Goldman Sachs Asset Management (GS), argues that you can still make money in this part of the market. Her group oversees some $11 billion in institutional and private accounts as well as mutual funds. Personal Business Editor Lauren Young spoke with Rominger about value investing and some of her current stock picks.

Why are value stocks still dominant?

It shouldn't be surprising that value is outperforming growth. That's what it tends to do. When you look at the Russell 1000 Value and Russell 1000 Growth indexes, which are now 25 years old, value beats growth by three percentage points a year, on average. Economists Eugene Fama and Kenneth French, using their own indexes, show value beating growth by an average 2.6% a year over 75 years.

Are value stocks still a good buy?

On a price-to-book basis, value stocks are still trading at a 44% discount to their growth counterparts, which is pretty typical for the group. So they're not overvalued relative to growth stocks.

Are you avoiding any part of the value universe right now?

Telecom-service providers have not offered a great deal of value. Their returns on capital are weak and need to improve before the stocks will go up. Right now, returns are probably deteriorating.

What companies look strong?

CIT Group (CIT) is a bit of an orphan stock: It's not a bank, it's not a consumer-finance company. It had been owned by Tyco International (TYC), and even though the Tyco management never got involved in CIT, it tarnished [CIT's] credit ratings. The ratings agencies were overlooking the tremendous strength of its middle-market, business-oriented lending. We thought their credit ratings would be upgraded -- indeed they were. The cost of debt came down dramatically after the upgrade.

Any other examples?

RenaissanceRe Holdings (RNR) is a reinsurance company with improved returns. Its return on equity is about 20%. It is literally in the middle of the storm, having all kinds of catastrophe policies in areas slammed by the hurricanes. It's selling at a p-e ratio of seven times this year's earnings, and there's a lot of volatility in the stock because investors are worried about this terribly tragic storm season. But they are better than others at assessing risk. It's not about coming through it unscathed. It's about coming through it in a stronger position than your competitors.

Why is Time Warner (TWX) a big holding?

Investors' perception of the woes at AOL are overblown. Time Warner's cash flow continues to be quite strong. Cost cuts are in place, and any improvement in advertising will be positive for the stock.


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