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GROWTH TRUMPS VALUE?

Jan 14, 2019 | Dr C K Narayan | Fundamental Twist, Interesting Read, Long Term Impact | 5 Comments

GROWTH TRUMPS VALUE?

In the past couple of years Value investing has become a fad and icons of value investing have become more visible. You keep reading about the past and everyone is raking up some stock or the other that was bought by somebody when it was cheap and how it is now making millions. Papers are full of articles as is Whatsapp full of anecdotes of the ‘big money makers’ if only one had the foresight to buy them when they were of value. This barrage of information on value investing has led to many new investors labelling themselves as value investors.

2018 has not been such a good year for any kind of investing as the market has persisted in declining all through the year. However, the fascination with value investing remains undiminished. I am not too big a fan of this style of investing because I know that I don’t have the personality for it. I also firmly believe that most people espousing its qualities too do not have the kind of patience that is demanded of them. But they are engaging in it because it is currently hot and also it builds the image of some incredible wealth at some point of time in the future.

An interesting chart was published in the Business Standard that bears reading. This article, an extract of a Kotak report, showed two sets of stocks – one growth and the other value- and how they fared in terms their PE multiples until 2018. Here are the two charts. Take a look.

Using a one year forward PE, certain set of well-known Growth stocks and a few Value stocks have been plotted. The difference is startlingly visible. The Growth stocks have seen an improvement from the lower multiples of a few years ago, seeing a steady re-rating in their multiples until 2018 when all of them suffered a reversal. Still, they ended up substantially higher in terms of price and valuation compared to where they started off 5-6 years ago. For instance, Nestle India’s stock currently trades at 58 times its one-year forward earnings estimate. While the P/E is down from 63 times in March, it is way higher what the stock commanded in the past few fiscals. In a startling contrast is the situation for value stocks. These were stocks that were trading considerably beneath their historical PE values and hence considered of value back then. But the chart reveals that they had a very poor outing during the bullish times between the periods 2012-2017 and have been beaten down rather much in the fall of 2018, making them end up at valuations that are even below what they were traded at back in 2012! “The multiples of ‘growth’ stocks have expanded significantly over the past few years, following the sharp decline in global bond yields and the market’s increasing focus on earnings growth and ‘quality’ of companies” writes the Kotak report!

The choice, to me at least, is quite clear. Growth trumps Value every time! 5-6 years is sufficiently long term, in my world, for my investments to deliver. If they don’t, then I have just wasted my time. It may be fine for those that have a problem of incremental money flow month after month. But for those who have finite amounts of money and a desire to see it grow in a progressive manner within finite periods of time, I believe growth investing does a much better job.

I have gone one step further with this matter. In my Portfolio Management service I have created a CGM model- a Combined Growth and Momentum model- that uses fundamental metrics for stock selection as well as establish long term direction and then uses technical parameters to track momentum. Momentum is a given in the markets. It occurs, in bursts, for various reasons, some not entirely related to the stock’s fundamentals too. But all the occasions impart an additional boost to the growth prospects of the stock. My goal is to capture those momentum spurts to change my allocations so that I can capture additional alpha to my portfolio. To my satisfaction, this has been working out rather well. Momentum works on both sides- up or down.

The model also identifies two more important elements- finding when current momentum fizzles out and more importantly, when new downside momentum develops. This helps me, many times, to bail out of stocks at around the correct time and to avoid many that tick the boxes for growth but don’t do so for momentum. Sure, there are some where the growth story continues to unfold but at slower momentum and I may end up missing out on some. But that is something that I can live with as my desire is not to own all those ‘multi-baggers’ out there. A consistent 25% will do just as fine.

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