Growth Stocks Start Year Strongly, But Value Should Reassert Itself

by: David Brown posted on: February 09, 2007 | about stocks: IJK / IJT / IVW / IWF / IWO / IWP / IWZ / PWB / PWJ / PWT / VBK / VUG

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The new year started with a solid positive month in January. Nasdaq led the major indexes with a 2% gain, with all of the others up between 1 and 2%. All caps and styles were positive for the month.

Clearly, as so often happens in January, it was an especially good month for growth stocks. All growth cap indexes were up more than their corresponding value indexes. However, value continues to dominate in the trailing quarters, including the current one, and we believe this will continue for two reasons.

First, the margin for excess returns for growth over value was not substantial except in large caps. Second, our analysis of what the market wants continues to be heavily biased toward fundamentally strong valuations, i.e., price-to-sales, price-to-book, etc. Even within the growth style, cash flow growth and absolute growth metrics continue to dominate over simple earnings growth.

Moreover, January is frequently a positive month for growth stocks, so we should wait to see how February turns out before we conclude that growth is the style du jour. For now, we see the current environment as essentially a value-growth market with value being the more important.

It should be noted as well that sector rotation was a strong momentum factor throughout the month, with the highest performing stocks consistently appearing in better performing groups and sectors.

Recall that February 2006 was a downer month after a strong January, so what we have seen this past month may simply be a "January effect." February will be an important month in projecting the year ahead.

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