Want to beat the market? Academic work for decades has pointed the way: Invest in value stocks — stocks that are cheap relative to their earnings, cash flow or assets.
Since 1940, value stocks have beaten the broad stock market by an annualized 4.5 percentage points per year, according to The Leuthold Group, an investment research firm. But over the past 10 years, growth crushed value. The Russell 1000 Growth index topped the Russell 1000 Value index by an average of 3.5 percentage points annually.
What happened? Scott Opsal, a Leuthold analyst, cites earnings growth and price-to-earnings ratios. From July 31, 2008, through March 31, 2018, the growth index’s P/E rose 53% while the value index’s P/E expanded just 14%. Meanwhile, from the value index’s peak in May 2007 through March 31, earnings per share rose just 16% compared to 46% for the growth index.
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