At a historic discount to growth stocks, are value shares about to outperform?
Over the last 10 years, growth stocks have outperformed value shares by some margin â especially in the US. The MSCI USA Growth index is up 394%, while the MSCI USA Value Index has climbed 110%.
Source: Longterm Trends
Right now, the gap between growth and value shares is historically wide. But is this a sign of things to come, or a sign that value shares are about to bounce back in a big way?
Warren Buffett
According to Warren Buffett, the difference between growth and value investments doesnât make much sense. But this is a rare occasion (I can only think of one other) where I donât agree.
Buffettâs point is that all investing is about trying to buy shares for less than theyâre worth. And figuring out the value of a stock involves taking a view about the companyâs future growth.
I agree with all of this, but I donât think it means thereâs no distinction between growth and value. In my own portfolio, I have stocks that I own for different reasons.
I own some stocks because I expect future cash flows to be higher â these are growth stocks. In others, itâs because the share price doesnât reflect current earnings â these are value shares.
Time for a correction?
At the moment, the gap between growth stocks and value shares might well be the largest it has ever been. And when this has been the case in the past, things have often corrected sharply.
Source: Longterm Trends
I donât think, though, that this means value shares are set to catch up. Historically, the difference narrowing has been the results of things that have caused crashes in the stock market generally.
The difference in valuation might be unjustified (or it might not). But thereâs no rule that says that just because itâs expanded it has to contract in the near future.
I do think, though, that the unusually wide discrepancy in valuations means itâs an interesting time to be looking at value shares. And a few look interesting at todayâs prices.
A stock to consider
Polaris (NYSE:PII) is one example. Shares in the recreational vehicle company are down around 30% over the last year as the firm has had to deal with a various challenges â most notably, tariffs.
This has had an effect on both revenues (which have fallen) and net income (which has turned negative). And the chance of inflation in the US leading to higher interest rates is an ongoing risk.
I think, however, that things arenât as bad as they look. The net income loss was due to non-cash impairment charges, which canât be ignored entirely but should be one-off in nature.
The companyâs strong brands and extensive dealer network should put it in a strong position when demand recovers. And with an unusually high 4.5% dividend yield, I think itâs worth considering.
Growth and value
As growth stocks have outperformed value shares, the gap between the two has reached its widest level in history. And the relative discount is a sign the latter are out of fashion.
This doesnât have to change in the near future, but long-term investors should take note. While not all value stocks are the same, I think Polaris is a quality name thatâs worth checking out.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
