Do value stocks have scope to run further?

Adriaan Pask, Chief Investment Officer at PSG Wealth.

Research recently undertaken by analysts at PSG Wealth has found that returns from value and growth stocks could start converging again. However, unlike last time, this time value stocks could well have the upside.

“The two investment styles were highly correlated from 2007 until about 2012,” says Adriaan Pask, Chief Investment Officer at PSG Wealth. “However, since then the JSE Growth Index started to outperform the JSE Value Index by 106%. This trend did, however, reverse at the start of 2016 when investors started to favour value stocks. From the start of 2016 the JSE Value Index outperformed the JSE Growth Index by about 17%. If these indexes start to converge again, value stocks could have the upside.”

Growth and value are two fundamentals styles of investing.

“Growth investors seek companies that offer strong earnings growth, while value investors seek stocks that appear to be undervalued by the marketplace,” explained Pask.

The performance of these different styles can be tracked through the JSE Growth Index and the JSE Value Index. “The Value Index is designed to imitate portfolios that focus on the price and value characteristics of securities,” Pask says. “These portfolios are usually weighted towards those companies with identifiable value characteristics.” The value measures which are considered include: the book to price, sales to price, dividend yield and its cash flow to price ratios.

The Growth Index is designed to mirror portfolios that focus on earnings and revenue growth. “These portfolios are usually weighted towards those companies with identifiable growth characteristics,” Pask says. Measures used to calculate growth are: historic earnings per share growth, historic sales growth, forward earnings per share growth and forward sales growth.