LB Thinking: Growth vs Value stocks

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high yield bonds with the potential for dramatic price appreciation. Today we're talking with Freddy Garcia, Vice President of Investments for Left Brain Wealth Management, and we're talking about growth versus value. And why it shouldn't be an either-or decision for your portfolio. Freddie Garcia, welcome back to Left Brain Thinking.

Well, hello, Chuck, and thank you for having me.

Growth versus value is just a great classic discussion. But at Left Brain, while you're looking for growth in the stocks that you are selecting, you are not looking at classic growth versus value. You think that this is not an argument that investors should necessarily be having. Why not? And if it's not going to be growth versus value, what is it?

Correct, Chuck. And one of the reasons I wanted to come on today was because the last 6 months we've seen this conversation in a lot of the headlines where, is it now time to switch from the growth stocks, which did extremely well last year? And now, for the first time in quite a while, value is outperforming growth for the first 6 months of the year. Because of that, many of the analysts and many of the experts are trying to tell people that now it's that time to make that switch because the value stocks had gotten so beaten up last year, it's a great time to make that switch back. At Left Brain, we don't look at things that way. We always look at the individual company, and of course, we're always focused on a stock that has the potential to double in 2 to 3 years. In order for it to do that, it has to have revenue growth, and that is a huge, huge take on our part. Does a company have sustainable revenue growth? And that's been one of the struggles with a lot of your traditional value companies. Many of them, in fact, have —negative revenue growth for the past couple of years. None of them can even boast double-digit growth like a lot of these traditional growth stocks that we look at. So we think investors should focus more on the individual companies rather than getting caught up in the minutiae of, is it time to switch from growth to value? And if they do so and keep that path, they're going to be better off in the long run, including even this year, because that trend that I talked about the first 6 months of the year where value outperformed growth, Now, just within about a month and a half, we're seeing that trend now change. By mid-May, all of June, the growth stocks had a huge rebound back. And a lot of that is playing into the fact that because they've continued to have that sustainable revenue growth, it comes back and causes that stock to rebound fairly quickly. And with the value stocks, these stocks tend to be more susceptible to, you know, economic downturns. And we saw that a lot last year. So if we compare the two stock styles, again, what did better last year when we had, you know, half the economy being shut down? Did a growth stock do better or did a value stock? And we saw the results. This year, as the talks of inflation continue to rise and as energy prices and just about the cost of everything else continue to go up this summer, we're finally seeing some of that catch-up back where the growth stocks have rebounded and some of the value stocks have set back. That's why it's important to kind of stay the course, pick the companies based on what you believe are very favorable metrics, and not sway from that.

It's also a case where you, me, and everyone we know really didn't come out and say, hey, this is the definition of growth and that is the definition of value. It is something that was kind of placed on the market based on the metrics of the first people to think we should sort things out this way. And it's more a measuring tool than it is really a, oh, you should go buy this or buy that. In fact, Jack Bogle used to say that one mistake he knew he had made was that he didn't love the idea that you could say, oh, let's take the S&P 500 growth index or value index. He didn't feel that that was the right way to do it. He would've just done the entire index. And so for you, As much as we're talking about these labels, do you guys use them at all internally? I mean, is growth versus value a discussion you ever have when you're actually doing analysis?

No, it's really not. And you're right, you quoted a, you know, a great analyst of the market where when he was trying to discuss, hey, let's look at comparing the market, he wasn't saying let's segment the market. He was looking at what are the top 500 companies. And if we go by his thinking, Jack Bogle's thinking, we can take a look at What are the top, the 5 biggest US companies right now? And they all happen to be tech companies. And these companies, well, some of them didn't exist over 20 years ago. Some of them came into existence just barely 40 years ago. But these companies weren't around 50 or 60 years ago because markets change. And 5 companies alone dominate the index. Now, if we go by that thinking of shifting to value or growth, we would be missing out on a big segment of the market. You wouldn't have Microsoft, you wouldn't have Amazon, Apple, Facebook, or Google. Those companies alone make a big percentage of the market. I don't know what it is exactly, but last I had heard it was almost like 35% of the market at one point of the S&P. So that way of antiquated thinking doesn't work anymore. We have to look at what's available out there, and at Left Brain we always look at the underlying companies, not segmenting. You also hear the analysts come out and they'll make remarks like, "Well, in the long run, value has outperformed growth, so you really should stick more into value." And then, God forbid, you happen to be an older investor, then you have to shift to the value stocks and forget about the growth stocks. Well, again, with that type of thinking, you're gonna be missing out on a lot of market returns and really not be able to maximize your growth. Also, the other thing that's creeping up right now again is inflation. So one of the best hedges against inflation is growth. Growth can solve all everything else when everything else is going up. As long as your investments are too, then you're going to be in good shape. That's why we don't focus on, okay, now we have to have our value stocks, we have to have our growth stocks.

Freddie, it's great stuff. Does it mean we should stop having the growth versus value arguments? I mean, we talk about it on my show Money Life all the time. Should we stop having these discussions or is there still something to be gained from using the terms to frame investments, even if we don't love exactly how it turns out?

Well, I don't think the discussions are going to stop, but what's going to happen is the data is going to keep changing. Now, when I mentioned before that you have analysts that say, well, again, value will outperform growth in the long run, they have to go back 40 years. They can't go back 20 years because they go back 20 years, you know, growth has outperformed. And now we're pushing to where we're in that 30-year mark. If you almost go 30 years, it shows that growth has outperformed value. So now they're up to 40 years. Eventually, that time frame is going to have to get bigger and bigger for them. They're going to have to go back 100 years to say, well, in the long run, values outperform growth. But as we're seeing a new market develop, and again, technology have a huge play in everything, that's going to have a huge difference on what makes up the overall market. And analysts are going to have to start looking at things differently. So that discussion of value versus growth, it may be around, but it's going to have to change. Because as more data comes in, we're going to have different metrics to measure it where they won't be able to say that, that whole term before where value will outperform growth. That's going to keep changing as more and more time comes in.

The moral of the story is if you're just discussing growth and value, you're discarding a lot of information when you get that simple. Freddie, great stuff. Thanks so much for joining me to chat about it.

Chuck, thank you for having me.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my hour-long weekday podcast at moneylifeshow.com or on your favorite podcast app. Thanks to my guest, Freddie Garcia, Vice President of Investments for Left Brain Wealth Management. Learn more about the firm and its services at leftbrainir.com. Go there to find out their latest take on a lot of stocks and bonds, and follow them on Twitter @LeftBrainIR. Left Brain Thinking is available every other Wednesday. Follow us on your favorite podcast app to make sure you don't miss a single chance to wear your left brain thinking cap. And until next time, happy investing, everybody.