Don't Give Up Hope, Value Investors
The numbers are stark.
In the 12 months through June, growth stocks returned 19.9%, while value stocks managed only 9.6%. Alas for value investors, the two previous years tell the same story.
In 2023 the scorecard shows a return of 30.0% for growth and 22.2% for value. In 2024 the score was 36.1% for growth, 12.3% for value. These are total returns including dividends, as calculated by Standard & Poor's Corp.
If you're a value investor by philosophy and temperament, as I am, what lesson should you draw? Jumping out of the nearest window is not a permissible answer.
Value stocks are out of favor stocks that are relatively cheap. Growth stocks are the stocks of companies whose earnings are growing fast. Naturally, people pay more for growth stocks. But how much more?
According to Larry Swedroe of Morningstar, The Russell 1000 Growth Index in recent years has typically sold for 32 times the component companies' earnings, The Russell 2000 Value Index has sold for about a 15 multiple.
That valuation gap has widened to a chasm. Now, the growth index goes for 42 times earnings and the value index fetches only about 14 times.
Mostly for that reason, I think value will make a comeback soon. But in the meantime, it wouldn't kill me to buy some stocks that have both value and growth characteristics.
Here are five stocks that I believe show both value and growth qualities. Each one sells for 15 times earnings or less yet shows earnings growth averaging 15% or better in the past five years.
Like its larger rival D.R. Horton Inc. (DHI), PulteGroup Inc. builds houses in a variety of styles, at several price points. Its average selling price is about $560,000, which is about 10% above the national average.
I like both Pulte and Horton, but I highlight Pulte because its five-year earnings growth rate, almost 32% a year, is slightly higher than Horton's. To truly thrive, homebuilders will need lower mortgage rates. I suspect that may happen in 2026.
With oil prices well off their highs, oil-and-gas stocks have had a tough year this year. I like them nevertheless, particularly Diamondback Energy Inc. (FANG), which is based in Texas and drills mainly in the Permian basin in western Texas.
Diamondback has averaged 35% annual earnings growth the past five years. The stock sells for about nine times earnings.
Crocs Inc. (CROX), which makes those shoes with holes in them that maybe your son or daughter wears, has increased its revenue by 20% a year over the past decade. Yet its stock sells for a measly eight times earnings (excluding nonrecurring earnings).
The smallest stock I'll recommend today is Eaco Corp. (EACO) of Anaheim, California, which distributes electronic connectors and fasteners. Investors know that distributors usually have slim margins; hence their stocks are cheap.
Eaco fits the bill, selling for about 10 times earnings. But its profit margin isn't so bad, about 7%. And earnings have been growth at a 23% clip the past five years.
Speculative but interesting is Catalyst Pharmaceuticals Inc. (CPRX), based in Coral Gables, Florida. It's a biotech company working on drugs for rare neurological and neuromuscular diseases.
Catalyst has three drugs on the market, and posted sales of more than $500 million in the past four quarters. All eight analysts who follow the stock like it. Such unanimity usually strikes me as a danger sign, but in the case, I happen to agree with the analysts.
This is the 19th column I've written about stocks that combine growth and value. The previous columns generated an average one-year return of 17.2%. That compares well to the 12.2% average return for the Standard & Poor's 500 over the same periods.
Bear in mind that my column results are hypothetical and shouldn't be confused with results I obtain for clients. Also, past performance doesn't predict the future.
Of the 18 columns, 13 were profitable and 12 beat the index.
My most recent column on this topic (written two years ago) was a dud, falling 2% through July of 2024 while the S&P 500 returned 22%. A 55% loss in Albemarle Corp. (ALB) was the fatal dagger. A 43% gain in Stifel Financial Corp. (SF) wasn't enough to save the day.
Disclosure: I own Diamondback Energy personally and for most of my clients. I own D.R. Horton for one client, and my wife (a portfolio manager at my firm) owns PulteGroup for one client.
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