close
Why Are These Dull Stocks Beating Amazon and Tesla?
April 08, 2021

Why Are These Dull Stocks Beating Amazon and Tesla?

As vaccines roll out and the world catches light at the end of the COVID tunnel, some old-school stocks are beginning to thump their chests. Walgreens Boots Alliance (WBA), for example, gained 38.84 percent over the first three months of 2021. Caterpillar (CAT) was up almost 28 percent. Meanwhile, the pandemic-era heroes might be running out of steam. Tesla (TSLA) for example, dropped 5.35 percent from January 1, 2021 to March 31, 2021. Amazon (AMZN) fell 5 percent and Netflix (NFLX) slipped 3.53 percent.

While it’s tempting to ask, “What's going on with these stocks?” it’s good to pan out and see the bigger picture. After all, the decade-long dominance of growth stocks might be coming to an end. In other words, it might be time for value stocks to shine.

When texting stock tips with your friends, value stocks rarely grace people’s screens. They have lower price-to-earnings multiples compared to growth stocks. But they don’t tend to be exciting. Few value stocks, for example, offer disruptive technologies. But over long periods of time, dull value stocks beat most exciting growth stocks.

For example, according to portfoliovisualizer.com, if $10,000 were split evenly between Large-Cap U.S. growth stocks, Mid-Cap U.S. growth stocks and Small-Cap U.S. growth stocks in 1972, it would have grown to $1,561,208 by March 31, 2020. Over the same time period, if $10,000 were split between Large-Cap U.S. value stocks, Mid-Cap U.S. value stocks and Small-cap U.S. value stocks it would have grown to a whopping $3,858,688.

Value stocks don’t beat growth stocks during every measured period. But after growth beats value, value roars back. For example, growth stocks beat value stocks by almost 4 percent per year from 1998-2000. But from 2000-2003, value beat growth by almost 10 percent per year.

Recently, growth stocks have had their greatest run ever. They averaged a compound annual return of 15.48 percent from January 2010 to March 31, 2021. Value stocks, in contrast, averaged a compound annual return of 12.41 percent. As shown on the chart below, growth stocks surged clear in 2018.

January 1, 2010 – March 31, 2021

Growth Stocks vs Values Stocks

But the tide might be changing in a really big way. For example, over the first three months of 2021, Vanguard’s Value Stock Index (VIVAX) gained a whopping 12.43 percent. By comparison, Vanguard’s Growth Stock Index (VIGRX) limped to 3.06 percent.

There’s an even bigger performance gap with Mid-Cap stocks. Vanguard’s Mid-Cap Value Index (VMVAX) gained 15.75 percent, compared to Vanguard’s Mid-Cap Growth Index (VMGIX), which gained 2.76 percent.

Perhaps no firm, however, has better expertise tracking value stock performances than Dimensional Fund Advisors.

DFA’s Large-Cap Value Fund (DFLVX) gained 15.96 percent for the quarter.

DFA’s Small-Cap Value Fund gained a scorching 27.84 percent.

Are Value Stocks Back To Thumping Growth?
January 1, 2021-March 31, 2021

Value Funds Q1 Return   Growth Funds Q1 Return
Vanguard Value Index (VIVAX) +12.43%   Vanguard Growth Index (VIGRX) +3.06%
Vanguard Mid-Cap Value Index (VMVAX) +15.75%   Vanguard Mid-Cap Growth Index (VMGIX) +2.76%
Vanguard Small-Cap Value Index (VISVX) +18.62%   Vanguard Small-Cap Growth Index (VISGX) +4.37%
DFA Large-Cap Value (DFLVX) +15.96%   DFA Large-Cap Growth (DUSLX) +5.69%
DFA U.S. Small-Cap Value (DFSVX) +27.84%   DFA U.S. Small Cap Growth (DSCGX) +13.5%

In June 2020, I wrote, Value Investors and Dimensional Investors: Don’t Get Fooled By The Norse God Loki. I explained that value stocks are always cheaper than growth stocks, but that the price-to-value gap had never been wider than it was in 2020. I wasn’t predicting value stocks would beat growth stocks after I wrote that story. Nobody can see the future. But peer-reviewed academic studies show that when growth stocks win, value always fights back.

What’s more, when we pile money into growth stocks that haven’t yet recorded business earnings, such stocks can suffer when people begin to say, “Wait! Let’s prioritize profits over stories!” Such might be the case with Cathie Wood’s ARK funds. In January, I profiled these funds in my column, Investors’ Great Expectations For Disruptive Technologies. If investors split their money evenly among the five ARK funds in January 2021 (ARKK, ARKQ, ARKW, ARKG and ARKF) they would have gained just over 1 percent three months later. Dull, value index funds left them in the dust.

If you’re investing in a diversified portfolio of low-cost index funds, you already own plenty of growth and value shares. But if you’ve stacked your portfolio with individual growth stocks or growth index funds (at the expense of value stocks) it’s time to diversify and then stay the course.

Related Articles

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.