Too Late to the Value Party?


By Sam Stovall It's time to check in on the classic investing rivalry:

growth vs.

value. The two styles each have their devoted adherents. But which one is generating better returns for investors as the current bull market enters its third year?

Well, it looks like growth is in the driver's seat. Year-to-date through Feb. 18, the growth components of the S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes each beat their respective value components by 50 to 270 basis points. But perhaps the growth fans shouldn't get too cocky. History tells us that the value side of the equation typically outperforms the growth side as the bull market ages.

Just take a look at the table below. During three of the past four times since 1976 that a bull market has entered its third year, the value component of the S&P 500 outpaced the growth component on both a percentage change and frequency of outperformance basis. This conundrum is now causing investors to wonder whether they should commit new money to growth or value stocks.

Average % Changes by Sector Three Years After Start of Bull Markets

Avg. Freq. Of Outperf.

Avg. % Chg.

10/92-10/93

12/89-12/90

8/84-8/85

10/76-10/77

S&P 500

NA

3

13

(7)

13

(8)

Growth Group

25%

(1)

4

(2)

11

(16)

Value Group

75%

4

20

(11)

14

(5)

The S&P growth and value subgroups are based on price-to-

book value ratios. Every June and December, all stocks are sorted by price-to-book value per share. Those companies with high price-to-book values are called growth stocks, while the low price-to-book companies are tagged as value. Even though there's an uneven number of stocks on both lists, both sides have an equal amount of total market value.

The accompanying table shows the breakdown of growth and value constituents by index and sector, allowing you to see which sectors are mainly growth or value, based on the percentage distribution of companies. For instance, investors might view Utilities as predominantly a value sector, since a majority of its companies are assigned to the value component, regardless of market cap.

Growth/Value Distribution by Sector (Company Count)

Sector

500 Growth

500 Value

400 Growth

400 Value

600 Growth

600 Value

Consumer Discretionary

35

52

37

34

48

61

Consumer Staples

23

13

6

9

9

11

Energy

6

22

10

12

16

11

Financials

6

76

20

42

19

51

Health Care

30

25

28

11

43

32

Industrials

25

32

34

26

42

72

Info. Tech.

36

44

35

39

51

71

Materials

12

20

7

19

11

29

Telecom. Svcs.

2

8

1

1

1

2

Utilities

3

30

4

25

2

18

Total Index Count

178

322

182

218

242

358

Percentage of Total

36%

64%

46%

54%

40%

60%

Distribution Percentages Within Each Sector

Sector

500 Growth

500 Value

400 Growth

400 Value

600 Growth

600 Value

Consumer Discretionary

40%

60%

52%

48%

44%

56%

Consumer Staples

64%

36%

40%

60%

45%

55%

Energy

21%

79%

45%

55%

59%

41%

Financials

7%

93%

32%

68%

27%

73%

Health Care

55%

45%

72%

28%

57%

43%

Industrials

44%

56%

57%

43%

37%

63%

Info. Tech.

45%

55%

47%

53%

42%

58%

Materials

38%

63%

27%

73%

28%

73%

Telecom. Svcs.

20%

80%

50%

50%

33%

67%

Utilities

9%

91%

14%

86%

10%

90%

The table below shows the disproportionate percent changes between the growth and value components within each benchmark over the past five years. Readily apparent, in our view, is that mid- and small-cap investors weathered the recent market volatility quite well, especially if they were heavily weighted toward the value side.

Cumulative % Performances: Dec. 1999-Dec. 2004

Growth

Value

S&P 500

(34.4)

2.4

S&P MidCap 400

18.3

88.1

S&P SmallCap 600

37.9

90.4

But it's precisely due to value's recent strong relative outperformance that makes investors wonder, in our opinion, if valuations now fully reflect this price runup. And do they fully discount projected earnings growth over the coming one to five years as well?

The table below shows that S&P equity analysts currently project a 9% year-over-year increase in operating earnings for the S&P 500-stock index, along with earnings increases of 11% for the S&P 500 Growth and 9% for the S&P 500 Value indexes. It also shows the price-earnings ratio on estimated 2005 results, as well as p-e to projected five-year consensus earnings growth rates (PEG) and S&P analysts' cap-weighted STARS recommendations.

Earnings growth is projected to be stronger for the value stocks in the 400 and 600, but in the 500, growth stocks have the edge. The PEG ratio is more attractive for large- and mid-cap value stocks, but equal for small-caps. Finally, we see that S&P's STARS rankings favor growth stocks in the large- and mid-cap indexes, but are evenly balanced in the small-cap arena.

ESTIMATED EARNINGS & VALUATIONS -- 2005

2005e Oper. EPS % Chg.

P-E

PEG

STARS

S&P 500

Index

9

16

1.4

3.7

Growth Component

11

19

1.5

3.8

Value Component

9

14

1.3

3.5

S&P MidCap 400

Index

13

17

1.2

3.4

Growth Component

12

21

1.3

3.5

Value Component

14

15

1.2

3.2

S&P SmallCap 600

Index

19

17

1.2

3.2

Growth Component

13

19

1.2

3.2

Value Component

26

16

1.2

3.2

Our conclusion at S&P: Much of the relative advantage that value stocks, as a whole, have historically experienced during this stage of an aging bull market may have already occurred. Yet even though growth stocks, as a result, may become the category of choice in the near term, we believe investors may once again be lured back to the value side should concerns increase regarding slowing earnings, rising interest rates, and accelerating inflation.

With that in mind, S&P recommends that investors pay less attention to style, and even sector, and focus more on the quality of the individual company. The following table lists the 5-STARS stocks with the largest market cap in each growth/value category, as well as non-STARS-ranked exchange traded funds (ETF) that mimic each growth and value index by market cap.

S&P 500 Growth & Value Picks

Growth

Value

Consumer Discretionary

Best Buy (BBY), $52

--

Consumer Staples

Wal-Mart (WMT), $51

CVS (CVS),$48

Energy

--

ChevronTexaco (CVX), $60

Financials

Simon Property (SPG), $62

Citigroup (C), $48

Health Care

Zimmer Holdings (ZMH), $84

WellPoint (WLP), $119

Industrials

Apollo Group (APOL), $74

FedEx (FDX), $97

Info. Tech.

Microsoft (MSFT), $25

EMC (EMC), $13

Materials

Dow Chemical (DOW), $54

--

Telecom. Svcs.

--

CenturyTel (CTL), $33

Utilities

AES (AES), $16

--

Index ETF

iShares 500 Growth (IVW), $57

iShares 500 Value (IVE), $62

S&P MidCap 400 Growth & Value Picks

Growth

Value

Consumer Discretionary

Int. Speedway (ISCA), $54

Lennar (LEN), $56

Consumer Staples

--

Constellation Brands (STZ), $53

Energy

Smith Intl. (SII), $64

--

Financials

Commerce Bancorp (CBH), $58

IndyMac (NDE), $36

Health Care

Coventry Health (CVH), $63

PacifiCare (PHS), $61

Industrials

Dun & Bradstreet (DNB), $60

--

Info. Tech.

Lam Research (LRCX), $29

Powerwave (PWAV), $7

Materials

--

FMC (FMC), $48

Telecom. Svcs.

--

--

Utilities

Questar (STR), $52

--

Index ETF

iShares 400 Growth (IJJ), $127

iShares 400 Value (IJK), $133

S&P SmallCap 600 Growth & Value Picks

Growth

Value

Consumer Discretionary

Guitar Centers (GTRC), $57

Standard Pacific (SPF), $74

Consumer Staples

--

--

Energy

--

--

Financials

--

--

Health Care

Cooper Cos. (COO), $81

--

Industrials

Landstar (LSTR), $34

Watts Water (WTS), $33

Info. Tech.

WebEx (WEBX), $23

--

Materials

--

Carpenter Technology (CRS), $63

Telecom. Svcs.

--

--

Utilities

--

--

Index ETF

iShares 600 Growth (IJT), $107

iShares 600 Value (IJS), $119

Stovall is chief investment strategist for Standard & Poor's


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