Growth stocks will outperform during a recession and underperform during an expansion. Why?
supply and demand… there are fewer growth stocks during a recession…hence, there is a scarcity premium on them…
During expansiong, everybody is “growing”===>who cares you are growing 10%, GOOG is growing 1000% During recession, nobody is “growing”===>you can growing 10%, where can I sign??
Good points - thanks guys. I owe you a pint.
correction: it does NOT say that growth stocks will underperform during an expansion. it does say that in a contraction, growth stocks do better they would in an expansion due to the valuation premium associated with the growth (scarcity). growth stocks may or may not outperform value stocks during an expansion, and there are strategies that are designed to take advantage of a manager’s expectations in this regard (the market-oriented strategy with a value or growth tilt is specifically mentioned in SS10). not to confuse things, but this is the sort of question they like to trick people on.
side question. Why do value stocks have higher earnings volatility? (Q3B, exam 3, Schweser) - sticky
The way I’ve made logic out of this is as follows: What makes certain stocks value stocks is the belief that their current value/price is below their intrinsic price. Therefore, for the price to be lower, it would mean that earnings have been volatile and it’s pushed the stock price down. Compare that to growth stocks where during a recession, investors are looking for any sign that growth will occur and will apply a higher P/E ratio to a growth stocks earnings than that of a value stock. That’s really the only way I can make any sort of logic from it… PJStyles
i dont agree with either statement CFAI makes about growth/value stocks but that doesn’t really matter… value stocks are cheap for a reason, often times because of earnings volatility. look at citigroup, ford, just about any company that has a huge swing in earnings for the worst becomes value.
thanks guys. This makes it easier to REMEMBER (well, not understand ) - sticky
The value statement is being misinterpreted. What you should remember is the context, which is holdings-based analysis of style: I look at a portfolio, and over the last 5 years, I see that the earnings growth of the companies held in the portfolio are volatile. This tells me that the manager is value-oriented. If he was growth-oriented, he would have sold these long ago. It’s not saying that “value stocks have more volatile earnings”.