Why it's time to switch from value to growth stocks

Value stocks have outperformed growth over the past 30 years, research suggests. But it could be time for growth to make a comeback...

According to academic research, says Beth Piskora on BusinessWeek.com, between 1974 and 2005, value stocks have outperformed growth stocks. But the S&P 500/Citigroup Pure Growth and Pure Value indices now hint that the market may be about to enter a period of growth-stock outperformance.

Not only has the momentum been with them over the last four months, but p/e ratios are lower than for value stocks. Hence, S&P's chief investment strategist, Sam Stovall, has "strong buy" recommendations on 18 companies in the Pure Growth index: Capital One (COF, $89.39), Coach (COH, $36.54), Colgate-Palmolive (CL, $54.89), Danaher (DHR, $61.92), Electronic Arts (ERTS, $51.05), Eli Lilly (LLY, $55.74), Home Depot (HD, $42.28), Johnson & Johnson (JNJ, $58.76), Kohl's (KSS, $44.87), Microsoft (MSFT, $26.71), Mylan Labs (MYL, $23.39), Nabors Industries (NBR, $67.99), PepsiCo (PEP, $59.47), Procter & Gamble (PG, $61.94), UnitedHealth Group (UNH, $59.57), Valero Energy (VLO, $54.88), Wal-Mart (WMT, $45.91) and Wrigley (WWY, $64.20).

Out of a further ten growth stocks tipped by Morningstar.com and Kiplinger.com, the most popular is Fastenal (FAST, $43.39), which makes and sells more than 250,000 kinds of fastener, has a total product line of "more than 500,000 items" and runs 1,800 stores. Its stock trades at 32 times estimated earnings per shares of $1.36 for this year, so Fastenal is "pricey". But the company estimates that "there is room in the US and Canada for least 2,500 stores".

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There is also potential for overseas expansion, and a recent store-remodelling programme "raised sales per employee by more than 30%". As a result, Jeffrey Germanotta of investment bank William Blair thinks that Fastenal "is well positioned to deliver 25% yearly earnings gains over the next few years", putting the company on a price/earnings to growth ratio (see page 46) of 1.28 (1.53 in the opinion of Yahoo).

The other nine growth stocks that "pass muster", according to Kiplinger's and Morningstar, are Strayer Education (STRA, $99.84), 3M (MMM, $74.05), Sysco (SYY, $30.27), International Game Technology (IGT, $36.04), Adobe (ADBE, $39.19), WellPoint (WLP, $77.96), Harman International Industries (HAR, $108.04), Carnival Cruise Lines (CCL, $51.67) and Walgreen (WAG, $46.18).

Charlie Gibson

Charles has previously written for the MoneyWeek, giving readers his share tips regularly and covering other topics on the side such as stock markets and the economy. He has also written for The Business, Shares, Investors Chronicle and The Evening Standard, and Charles has presented on LBC and been a guest on BBC One and BBC World. Aside from his journalist background, Charles graduated as a chemist from the University of Oxford specialising in ligand gated ion channels.