As risks outweigh growth, Wall Street looks for value
NEW YORK » As stocks hit record after record in the past decade, investors didn’t much care if a stock was cheap or expensive. What mattered most was: Is it growing quickly?
If the answer was yes, the stock was in high demand, almost regardless of the price. Investors were ravenous for companies able to add customers and deliver fat growth. So they were willing to pay premium prices for an Amazon or a Netflix. Left behind were stocks in more staid industries, even if they looked like better bargains by several measures.
Suddenly, though, the siren song of high growth has gone dissonant. As markets tumbled in recent weeks, the stocks that were soaring the highest have fallen the fastest. Worries about interest rates and global trade are raising concerns about the companies’ future growth. Plus, highgrowth stocks had further to fall given how much more expensive they had grown versus the rest of the market by various measures.
So far this month, high-growth stocks in the Russell 3000 index have sunk 9 percent, versus 6.5 percent for their lower-priced counterparts known as “value” stocks, as of Thursday. It’s the biggest such monthly gap in performance since November 2016.
If the long run of dominance is indeed over for growth stocks, the stakes could be huge. It would mean pain for investors who went all-in on the sexy, high-flying stocks that so dominated cocktail-party conversations.
Even investors with more-vanilla index funds would take a hit. The supercharged performance for high-growth stocks means companies like Amazon, Facebook and Google’s parent have swelled in market value. Those three, plus Apple and Microsoft, make up more than 15 percent of the S&P 500 index by themselves. So, movements in their
stock price have more influence on S&P 500 index funds than smaller stocks.
Perhaps more ominous is the market’s track record. The last two times the pendulum swung sharply between dominance for value and growth stocks occurred around two of the most dramatic implosions in the stock market’s history: the 2000 dot-com
crash and the 2007 onset of the Great Recession.
To be sure, many investors say the market can shift from one led by growth stocks to one led by value stocks without cratering. And the market has given head fakes before, where it seemed like value stocks were about to regain leadership, only to fade back again.
The jockeying continued late in the week. On Thursday, growth stocks once again led the way as the market clawed back some of its losses from the
last few weeks. But Friday, growth stocks again were heading lower.
In a sign that dizzying profits are no longer enough to placate investors, Amazon and Alphabet each reported quarterly profits that beat Wall Street estimates, but their shares fell because revenue came up short.
Shares of both companies are down sharply in the past month, and they’re sliding again in early trading Friday, with Amazon down 7 percent and Alphabet off by 3 percent.
Many investors see the reversal from growth to value as inevitable, simply because high-growth stocks have become much more expensive than value stocks.
“We know that this condition is more indicative of a mania of some sort, though we couldn’t tell you when it ends,” said Barry James, president and portfolio manager at James Advantage Funds and an investor who prefers what he calls “bargain stocks.” ‘’But when it ends, it ain’t pretty.”