why do value stocks have higher earnings volatility than growth stocks?

so it says value stocks have higher earnings volatility than growth stocks

i’ve read some other places on the net saying this is so because value investors are banking on the stocks to recover (i.e. mean revert) to their historical levels…but if they don’t recover the stock drops more …

but this doesn’t seem like the greatest response …i’ve also read about value stocks being more cyclical?

anyone want to explain this? i thought earnings volatility for growth stocks would be higher


Growth stocks earnings are likely to grow year on year, as the company expands. Whereas for value stocks the company earnings could go either way depending on the mean and the sensitivity of earnings compared to the economy.

yeah , earnings momentum is not a feature of value stocks while for growth stocks it is vital.

The curriculum considers volatility mostly a downside effect , which would be expected of a value stock . They become or are value becuase their earnings have been pummeled , and it would take a value investor to consider them worthy of investing

Who cares why? I disagree with CFAI but this is their test. I also think the fact that growth stocks “outperform in down markets” is kind of hilarious and an insane generalization, but thats what im writing on the test!

Just read this on a Schweser practice exam, thought it sounded wrong, Google-searched, and found this thread.

Hilarious. I am not sold on the proposed solution, but I will hope to see this question on the exam, write it down, think +1, and move on.


value stocks are usually companies in cyclic industries.

this. also, the statement is about earnings vol, not stock vol. w/ growth stocks if they disappoint by a penny they get killed. not so w/ value.

In this same vein - why do they always pound the fact that venture funds have lower average returns than buyout funds? Why would anyone every do venture then? Taking on higher risk to get a lower average return doesn’t make sense?

Also - can anyone cite a few pages where this growth vs value material is found (CFAI preferably)? I have not come across these generalizations.

it actually depends on what timeframe you are looking at. over the last 10 years only, venture capital has outperformed P/E. if you include the 80’s, then obviously P/E does better. and while VC may have lower average returns, it always has wider dispersion and a lot of crappy VC’s drag down the average. it’s a lot easier to lose in a VC deal, but when you win… you win big.

Thx prophets

Is it because they consider value stocks companies that are beaten down (greatly decreased in price). If the decreased price doesn’t reflect fundamentals, then it will revert to the mean. If the analyst missed a crucial piece of information, the stock price could decrease further.