Return of the growth stock

By Carolyn Bigda

(Money Magazine) -- The stock market can be divided into two camps. On one side you have shares of fast-growing -- but often high-priced -- firms whose earnings are expanding more rapidly than the market (think Google or Apple). Then there are value-oriented shares of boring but reliable businesses that go through cycles of being unloved and rediscovered (examples: Exxon Mobil and Boeing).

These groups take long turns beating each other. In fact, value had been leading since the 2000 crash. But after the financial crisis in 2008, growth has been quietly staging a comeback that's likely to continue. Here's why.

1. Economic conditions are ripe for a growth comeback...

It sounds counterintuitive, but these stocks "get more respect when earnings growth is harder to come by," says Dave Hintz, Russell Investments' head of U.S. equity research. After all, when the economy is hot, you can find profits anywhere. But in modest times like now, investors covet strong growers.

2. And value isn't cheap anymore

Since value investing is all about buying stocks priced below what they're truly worth, this strategy makes sense only when this group trades at a considerable discount. Based on price/earnings ratios, that's not the case today.

3. Meanwhile, growth is attractively priced

Historically the P/E ratio for growth stocks is more than eight points higher than that of value shares. Today that has narrowed to two points. When this gap is small, it's usually good news for growth.

4. Down for a decade, tech has already begun to rebound

Technology, a favorite sector among growth investors, had been the market's worst-performing group since 2000. But a recent survey by Russell Investments found that tech is now the sector that professional money managers are most bullish on. So there's hope yet.

5. Finally it's time to be contrarian

Andy Stephens, a portfolio manager at Artisan Funds, says money has been pouring out of growth funds. Since individual investors are terrible timers, this is actually a sign that growth may be ready to rally.  To top of page

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