After shares of Netflix and Facebook took a beating late last month, there has been buzz about this being the right time for investors to move at least some of their money from growth stocks to value stocks.
Consider these stories:
Netflix NFLX, +0.50% and Facebook FB, -1.13% are two of the FAANG stocks — a group that also includes Apple AAPL, +0.79% Amazon.com AMZN, +0.64% and Google holding company Alphabet GOOG, +0.28% GOOGL, +0.25% These companies together have a market value of $3.6 trillion, making up an astonishing 13% of the S&P 500 Index’s total market value. Their rapid sales growth has been a major driver for increasingly popular index funds in recent years. So arguments for moving away from growth stocks often center on the FAANGs.
The simplest way to divide stocks into growth and value camps is to divide the market in half by price-to-book-value ratios. The Russell 1000 Index RUI, -0.11% is divided into the Russell 1000 Growth Index RLG, +0.01% and the Russell 1000 Value Index RLV, -0.23% using price/book as well as earnings growth forecasts and five years of sales per share.
There’s no question that during this bull market that began in March 2009, the growth approach has been a better performer for investors. Here are how the Russell 1000 Index, the Russell 1000 Growth Index and the Russell 1000 Value Index have performed over various periods:
Three years through Aug. 6:
The value approach shows its value in the 20-year chart:
So the Russell 1000 Value Index is the 20-year winner. However, it has only outperformed the full Russell 1000 by less than 1% for that entire period. This puts the entire growth-versus-value debate into question.
Growth stocks at value prices
Taking a broader look at the market, we divided the S&P 1500 Composite Index in half by the price/book ratio using data supplied by FactSet. (The S&P 1500 Composite Index is made up of the large-cap S&P 500, the S&P 400 Mid-Cap Index MID, -0.11% and the S&P Small-Cap 600 Index SML, +0.08% ). Any company with a negative book value, as per its most recently filed quarterly report through Aug. 6, was excluded. That left us with a group of 724 “value” stocks.
Then we sorted this “value” group of companies by how much their sales per share had increased over the past 12 months from the previous 12-month period (assuming eight quarters of data were available). We looked at sales per share rather than raw revenue because the per-share numbers incorporate any dilution to the stock caused by the issuance of new shares. If a company funds an acquisition with new shares, the per-share numbers can give a better indication of whether the acquisition was “worth it” for the acquiring company’s shareholders.
We then reviewed companies’ gross profit margins. A company’s gross margin is its sales, less the cost of goods or services sold, divided by sales. It does not take overhead expenses into account, but it is useful when considering the quality of a company’s core business. If sales growth comes as a result of a significant lowering of prices in the face of competition, the trend is not sustainable. It’s a healthy sign if a company’s sales are growing rapidly while its gross margin is widening. We excluded companies with negative gross margins either for the most recent 12 months or the year-earlier 12-month period.
After applying the sales-per-share growth and gross margin screens, we were left with 22 companies in our S&P 1500 value group with sales per share rising by at least 30% over the past 12 months, while gross margins improved. Here they are, sorted by sales growth:
|Company||Ticker||Type||Increase in sales per share – Past 12 reported months from year-earlier 12-month period||Gross margin – past 12 months||Gross margin – year-earlier 12-month period||Price/ book ratio||Total return – 2018 through Aug. 6|
|SRC Energy Inc.||SRCI, -0.20%||Oil and Gas Production||155%||54.94||48.35||1.85||29%|
|Knight-Swift Transportation Holdings Inc. Class A||KNX, -0.58%||Trucking||98%||16.23||15.77||1.10||-25%|
|Ring Energy Inc.||REI, +4.67%||Oil and Gas Production||84%||42.50||38.83||1.63||-14%|
|Energen Corp.||EGN, +0.31%||Oil and Gas Production||73%||35.43||9.77||2.03||29%|
|U.S. Silica Holdings Inc.||SLCA, -0.16%||Metals/Minerals||70%||23.22||13.97||1.43||-23%|
|DXC Technology Co.||DXC, -1.96%||Data Processing Services||58%||18.93||18.60||1.84||6%|
|Concho Resources Inc.||CXO, -0.08%||Oil and Gas Production||51%||38.98||19.34||2.04||-10%|
|Micron Technology Inc.||MU, -2.12%||Semiconductors||48%||56.43||33.92||2.13||28%|
|TRI Pointe Group Inc.||TPH, -0.14%||Homebuilding||44%||22.72||19.90||1.05||-22%|
|Oasis Petroleum Inc.||OAS, +1.35%||Oil and Gas Production||41%||29.03||16.15||1.07||50%|
|Callon Petroleum Co.||CPE, +1.72%||Oil and Gas Production||40%||53.22||45.31||1.14||-11%|
|Newpark Resources Inc.||NR, +0.00%||Oilfield Services/Equipment||40%||18.95||14.07||1.69||20%|
|Cal-Maine Foods Inc.||CALM, +0.54%||Food: Specialty/Candy||39%||24.02||4.24||2.32||3%|
|Capstead Mortgage Corp.||CMO, -0.12%||Real Estate Investment Trusts||38%||99.96||99.94||0.83||-2%|
|TimkenSteel Corp||TMST, +0.29%||Steel||36%||5.44||4.73||1.10||-8%|
|Phillips 66||PSX, -0.65%||Oil Refining/Marketing||35%||4.88||3.47||2.52||23%|
|Winnebago Industries Inc.||WGO, -1.25%||Recreational Products||35%||16.10||12.43||2.50||-27%|
|Valero Energy Corp.||VLO, -0.66%||Oil Refining/Marketing||32%||5.14||4.30||2.26||28%|
|HollyFrontier Corp.||HFC, -1.53%||Oil Refining/Marketing||31%||12.59||4.32||2.06||35%|
|William Lyon Homes Class A||WLH, +0.84%||Homebuilding||31%||18.54||16.86||1.01||-28%|
|McDermott International Inc.||MDR, -0.68%||Oilfield Services/Equipment||30%||16.73||13.35||1.01||1%|
|PulteGroup Inc.||PHM, -0.31%||Homebuilding||30%||22.94||21.41||1.80||-13%|
It’s probably not a surprise to see 12 companies in the energy sector on the list, with the price of West Texas crude oil CL1, -3.34% rising 39% over the past year, through Aug. 6.
It’s also worth noting how volatile some of these stocks have been this year, with 17 moving up or down by double digits. That movement underscores how important it is to form your own opinion (based on your own research) about a company’s long-term viability — think five years or a decade — before making an investment.
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