David Einhorn, one of the billionaires in TradeStops’ Billionaires Club, reported terrible results at the end of July. His Greenlight Capital fund has lost 18% so far this year, and he blamed his poor results on the underperformance of value stocks compared to growth stocks.
His observation was that the Russell 1000 Growth stocks have dramatically outperformed the Russell 1000 Value stocks, and he expects that this outperformance will end sometime soon.
We looked at the results of growth stocks versus value stocks over different timeframes to see if this is a valid reason for his underperformance.
Simply defined, growth stocks are stocks that are anticipated to grow at a rate significantly above the market. Value stocks tend to trade at a lower price relative to their fundamentals. We’re using the iShares ETFs for this comparison.
Since 2015, the Russell growth stocks have outperformed the Russell value stocks by almost 116%, with most of the outperformance coming in the last 18 months.
Both ETFs hit their SSI Stop signals when the market dropped in early February this year. IWF has recovered while IWD still has a long way to go.
IWF triggered a new SSI Entry signal in early June and made a new all-time high in late July.
IWD is recovering but still has not triggered an SSI Entry signal, and half of the top 10 stocks are in the SSI Red Zone.
While the last three years’ growth has, in fact, outperformed value, this hasn’t always been the case. If you look at performance going back to 2000, value stocks have dramatically outperformed growth stocks. IWD was up almost 85% for its first seven years while IWF was down about 15%.
The bottom line is that there have been periods of outperformance by both growth and value stocks. We’ve seen that after these periods occur, they tend to revert to their mean (as seen below).
And as always, it’s important to pay attention to the signals.
We believe that value stocks will become good investments when the signals tell us that it’s a good time to invest in them. At some point, IWD will trigger a new SSI Entry signal, and we’ll be more interested in looking at value stocks at that time.
But going back to David Einhorn — does the outperformance of growth versus value mean his complaint is justified?
The answer is “yes and no.” He has a real point that growth has dramatically outperformed value, to a degree that would hurt any investor who was exclusively focused on value stocks these past 18 months.
But at the same time, if he had monitored TradeStops, he might have caught the message that “value isn’t where the value is,” at least for now. The signals telegraphed the fact that value over growth wasn’t an optimal market stance.
And again, once the situation changes — which it will, as all things move in cycles and value will again outperform someday — the signals will let us know.
Have a good weekend,
Richard Smith, PhD
CEO & Founder, TradeSmith