Judging by the results through the third quarter of 2006, value stocks are heading for another year of outperformance.
Value stocks trade at relatively low prices, compared with their earnings and assets.
Growth stocks, on the other hand, are those where earnings and cash flow are expected to grow at above-average rates.
Through the third quarter of 2006, mutual funds holding large-company value stocks were up nearly 10 percent, according to Morningstar, while funds focusing on value stocks from small and medium-sized companies returned over 7 percent. During the same time period, growth funds averaged 1-2 percent returns.
This has been going on for a while now. Over the last three years, large-, mid- and small-cap value funds returned 14-16 percent while those categories of growth funds returned 8-12 percent a year. A similar pattern can be seen for five-year returns.
The ironic results: after years of underperformance, growth stocks and funds holding growth stocks may offer better values than value stocks. You shouldn’t give up on growth; in fact, this may be the time to rebalance your portfolio by putting more investment dollars into growth issues.
