Value stocks have underperformed growth stocks for over a decade now. This can be observed through the valuation of sectors like financials, industrials, and materials. Growth stocks have outperformed every other factor over the years, the perfect example would be the FAANG (Facebook, Amazon, Apple, Netflix, and Alphabet’s Google). Sectors like technology and biotechnology comprise mostly of growth stocks and tend to trade at higher valuations.
Why Are Investors Rotating Into Value Stocks?
Value stocks are the ones that usually trade at a relatively lower multiple like price to book (P/B), price to earnings (P/E), enterprise value to EBITDA (EV/EBITDA), or just simply are at a discount to their intrinsic net worth, often known as the discounted cash flow (DCF) valuation. Growth stocks are usually the ones that have higher growth potential.
A company being relatively early in its industry life cycle, delivering a new technology or product can be a few reasons fueling this growth, which is often reflected in the company’s sales or earnings number.