The Investment U e-Letter: Issue # 407
Friday, January 28, 2005

Value Vs. Growth Investing… Forget Value Now - Go for Growth
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U

Value, it seems, is overpriced now. All the “experts” are telling you that you’re safest in quality “value” stocks. Me, I don’t buy it as I weigh value vs. growth investing in 2005. Growth is where you should be looking, if you must put money to work in the coming years in stocks. Let me explain:

Let’s start with the “Where to Invest in ‘05″ issue of BusinessWeek, where the cover story is “The Watchword for the New Year is Quality.”

“Search out high-quality companies with consistent earnings growth that trade at a discount to their peers.” That’s the first “smart move” for 2005 that BusinessWeek recommends.

But you’ve got to know the track record of these BusinessWeek “Where to Invest” issues. In short, it’s not so good. Look, BusinessWeek was telling you to buy tech stocks in 2000. That was a very bad idea. And now it’s recommending you buy “quality” value stocks in 2005 versus growth investing. Once again, it’ll be a bad idea…

BusinessWeek’s seemingly safe, bland advice will likely turn out to be very bad, as “quality/value” stocks are at a premium right now, and growth stocks are cheap. Simply put, there’s no value in value stocks right now.

What’s more, value stocks have pummeled growth for the last five years, as I’ll show. Growth is unpopular now. Five years ago, BusinessWeek readers were proud to own Amazon. They left the old-line “value” stocks for the fuddy-duddies. Now, everyone wants value.

I’ve said it over and over… the way to make money is to buy what nobody wants and sell what people will pay any price for. And today, nobody wants growth. Everyone wants value. You know what to do. Let’s look just a little closer…

Value Vs. Growth Investing: Value Has Crushed Growth For The Last Five Years

Everyone wanted growth stocks in the late 1990s. Then the bubble burst. Since then, small-cap value stocks have crushed the big-name growth stocks:

Looking at that, you’d think value investing always beats growth investing. But it doesn’t work that way. The fads shift. It’s time for a recovery by growth…

Value Investing Is Overpriced Right Now

Basically, the premium you pay for growth investing right now is very small, and completely worth it…

According to www.Russell.com, stocks in the “small-cap value” category trade at a P/E of 20, with earnings growth in the 10% a year range. Meanwhile, stocks in the “large-cap growth investing” category trade at a P/E of 23, yet are growing earnings at 15% a year.

Another way to look at it is on Price-to-Book value, and by that measure, “growth” is currently at one of its smallest premiums in history to “value.”

Everyone is interested in “value investing” right now because it sounds “safe.” But it’s not. If you’re buying a “value” fund, chances are you’re buying an overpriced portfolio of slower-growing companies. Yuck.

So what’s the final word on value vs. growth investing? It’s time to search out growth opportunities. Growth is cheap. Value is expensive. It’s a strange moment. But it’s where we are.

So if you absolutely must commit new money to the stock market in the coming years, instead of going with the “value” fund that sounds safe, go for growth investing instead. Chances are good you’ll make a lot more money.

Good investing,

Steve

Today’s Investment U Cribsheet

• For more on the potential of growth vs. value investing this year, check out the Russell investing site at www.Russell.com. Read some of the articles there, get more educated and consider adding a few growth stocks to your portfolio.

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• Momentum Investing :Profiting by Knowing When Stocks Are Going to Soar
• Large Cap Growth in 2006: Not Necessarily… Beware the Behemoths

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