Market Health

Growth or Value: How Should Investors Position Themselves for 2022?

The end is nigh.

This year is drawing to a close.

It was another year of records. And 2021 definitely had its share of volatility and declines.

And with the potential for a rapid pace of tapering from the Federal Reserve – not to mention the pesky “transitory” inflation that isn’t so transitory anymore – investors are pondering how they should position their portfolios in 2022.

Now, there are two fundamental approaches to the market.

And these camps couldn’t be more different.

On one side, we have growth stock investing.

On the other, we have value stocks.

So what is the way to go in 2022?

Go Big or Go Home

Let’s start by tackling these two types of investing philosophies.

For growth stocks, we want earnings and revenue to be increasing at a high rate, defined as “better than average.”

These companies will often achieve this regardless of the underlying economic conditions.

This happens in part because growth stocks offer something very unique – a product or service no one else has or something competitors are trying to mimic.

That’s their advantage. That’s what’s fueling their share price trajectories.

Now, not all growth stocks will be profitable. In fact, most won’t be. But the belief is that they’ll achieve profitability in the future.

So with this considerable potential and a unique product or service, growth stocks will outperform the market… at least in theory.

That’s what makes them so alluring.

Amazon (Nasdaq: AMZN), Meta Platforms (Nasdaq: FB), Netflix (Nasdaq: NFLX) and Tesla (Nasdaq: TLSA) are your classic growth stock examples.

The downside is that growth comes at a premium.

The price-to-earnings (P/E), price-to-sales and price-to-book (P/B) ratios of these stellar companies are going to be higher than the market average – sometimes by eye-popping amounts. That’s because investors are willing to shell out a substantial premium for a piece of that potential lofty upside.

Now, because of this, growth stocks are very often far more volatile than the broader market. Any negative news or unflattering earnings reports will send shares cratering.

These are fortune makers… but also highfliers that are prone to turbulence.

A Trap or an Opportunity?

In contrast, a value stock is one that appears cheap compared with the company’s fundamentals, the market and its peers.

These stocks are going to have low P/E and P/B ratios and will often offer a high dividend yield or, at the very least, pay a dividend.

You could go out on a limb and argue that value investing can be viewed as the quintessential contrarian strategy. That’s because investors are trying to capitalize on the market’s inefficiencies and the fact that everyone else has overlooked a gem of an opportunity.

These are solid, normally mature companies that have fallen out of favor, which is why they’re so inexpensive. The idea is that other investors will eventually realize their mistake and push shares of these value stocks higher.

The gamble is that the crowd will stampede back into a value stock once it comes to its senses, rewarding those value investors who camped out.

The poster child for value investing is Warren Buffett. And Bank of America (NYSE: BAC), Kraft Heinz (Nasdaq: KHC) and Verizon Communications (NYSE: VZ) – some of Buffett’s favorites – are good examples of value stocks.

Value stocks tend to be less volatile than the market and often have a dividend to keep investors anchored to their positions… if they have the time and patience to let compounding do its magic.

But because of their nature, value stocks aren’t generally going to outperform the market. These will largely be cyclical companies that do well in the initial stages of an economic recovery but lack the stamina to outpace a sustained bull market.

Don’t Fight This Trend

Over the past year, growth stocks have done what they’re intended to do: They’ve outperformed value stocks and the broader market.

That said, the Vanguard Growth ETF (NYSE: VUG) hasn’t blown the doors off the S&P 500 Index year to date. And some will argue that it’s only about 6% ahead of the Vanguard Value ETF (NYSE: VTV).

There were moments early in 2021 when value had the upper hand. That’s bound to happen occasionally. Though, historically, those moments have been brief.

But looking back over the decades, the trend is clear: Growth outpaces value.

Now, some will exclaim that the dominance of growth stocks will come to an end with interest rate hikes in 2022. But the chart above includes the last round of Federal Reserve rate hikes – and every rate hike since 1994 – as well as three of the worst market crashes in history.

That’s a trend I don’t think investors should fight.

There may be a wobble or stumble in growth stocks after that first rate increase, but their long-term stride won’t be broken.

Here’s to high returns,

Matthew

Last Price:

Daily % Change:

Last Update:

Follow