For a basic explanation of value v growth stocks skip below the chart

  • The chart below shows the 3-year performance spreads between Growth and Value have reached levels last seen at the peak of the dot.com bubble
  • Kailash has documented the precarious valuations of many popular growth firms in quick takes to a barrage of recent research
  • With the chart rolling over hard, Growth Investors might be well served to begin exiting the most speculative growth stocks

If the future rhymes with history, we know the exits from such speculative extremes can become anything but orderly as the fallout from the prior peak saw growth decline 62%. For those interested in investing based on buying healthy companies with long histories of selling products at healthy profits please contact us here or visit our research explaining what we believe is a remarkable opportunity in growth at a reasonable price stocks as investors chase stocks that will grow fast based on the predictions of pundits.

Rolling 3 Year Return Spread Large Cap Growth - Large Cap Value

Growth and Value Stocks Explained Simply

The views here are designed to be broad and simple generalizations for novice readers. If you would like detailed research on the topic from our favorite books on the topic to some of the best peer-reviewed academic research, please reach out to info@nullkailashconcepts.com. Unlike many who view these as two distinct investment styles, KCR actually believes they are intrinsically linked. Search “growth” or “value” on our site and you will see this is something we have discussed at length in many of our Quick Takes and White Papers.

Growth Companies: generally speaking, these are firms that prioritize earnings growth over long time horizons. People who invest in growth stocks often expect these stocks to experience elevated rates of sales growth over a prolonged period of time. Many growth indexes identify growth stocks based on the presence of higher price-to-earnings ratios and other elevated valuation metrics like price to book. For example, if you look at the Russell 1000 Growth ETF you will see it has a P/E ratio of nearly 45x and a P/B ratio of 14x.

Value Stocks: generally speaking, these are firms that are established, profitable, and slower growing or have lower expected growth than their “growth” peers. These stocks often have market capitalizations that are modest relative to traditional measures of valuation. If you look at the Russell 1000 Value ETF you will see it has a P/E ratio of 24x and a P/B ratio of only 2.6x – an enormous discount to the growth index. Academic literature as well as KCR’s own research has established that, over the long haul, value stocks have outperformed growth stocks.

Thoughts Worth Considering:

When an investing strategy embeds long term expectations in a stock price like growth investing often does, it can lead to larger gains and larger rewards over the short term. This is something we discussed in our piece Who is the Next Amazon? and many others. One of the benefits of owning stocks and value stocks in particular is that, over very long horizons, they have tended to outperform bonds.

KCR has pulled no punches in its research process. We believe that with valuations on the broad S&P 500 well above the records seen at the peak of the dot.com bubble, the risks to investing in US stock markets are high. We do believe the selective ownership of mutual funds that specialize in buying high quality companies at reasonable to cheap prices represent an attractive option for long-term investors.

As we have documented, there have been terrific opportunities to buy Small Cap, Mid Cap, and Large Cap Quality companies at modest prices. We have also highlighted the many opportunities we believe exist in some of the safest stocks that also happen to sport healthy dividend yields.

Conversely, we have highlighted what we believe are the serious and growing risks of investing in “innovation” stories and highlighted opportunities in supposedly dead industries like energy. KCR’s research team believes that, in many ways, today’s markets have gone off the rails.

We believe promotional CEOs, newsletters, and portfolio managers are encouraging retail investors to chase performance of some of the most fundamentally weak firms we have seen in our many decades of investing. Where others make grand promises, KCR encourages caution and is committed to the traditional methods of investing that have proven themselves out over centuries of human history. We do not believe it is different this time. We believe history rhymes and that our deep roots in Behavioral Finance will serve us well in the decades ahead.

For those interested in finding investing strategies with historical merit that emphasize safety and income we may be a great service for you. As always, we are grateful for any interest. These are exciting times, but we also believe that same excitement is the reason to be fearful when others are greedy!

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

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