Value, growth or a bit of both?

We investment types love putting things into categories or themes, and shares are no exception.

Two of the most common labels are “growth” and “value”, which are terms investors have used for decades to describe different types of companies and investment styles.

A growth stock is a company where revenues and profits are expected to increase more quickly than the wider market.

These types of businesses typically reinvest heavily to fund further expansion, rather than returning profits to shareholders through dividends.

The technology sector is an obvious example, with NVIDIA a classic example of a growth stock in recent years.

Booming demand for artificial intelligence infrastructure has driven extraordinary increases in its revenues and profits, but interestingly, that doesn’t necessarily mean it is extraordinarily expensive.

Its share price has soared in recent years, but its earnings have risen substantially too.

NVIDIA trades at a forward price-to-earnings (PE) ratio that isn’t particularly high compared with the market, its own history or the rate at which its profits are growing.

That’s an appealing combination, which is sometimes described as “growth at a reasonable price”.

Value stocks generally sit at the other end of the spectrum.

These companies tend to be more mature businesses trading at modest valuations relative to their earnings.

They often pay higher dividends, in part because they have less need to reinvest all their profits into future expansion.

Growth stocks tend to be in sectors like technology, while value stocks are typically found amongst the financials, industrials, energy and materials sectors.

That’s a bit of a generalisation, and investors shouldn’t assume growth always means expensive tech companies, or that value simply means cheap.

Across the market you’ll find strong proponents of both growth and value investing.

Neither approach is inherently superior, although over the long term growth has had the upper hand.

Since 1995, the S&P 500 Growth Total Return Index has returned 12.2 per cent annually, compared with 10.0 per cent for its value counterpart.

Growth has also been the more frequent winner, although perhaps not by as much as you might expect.

Looking at the 32 calendar years since then (including 2026 to date) growth has outperformed value 19 times, while value has come out on top 13 times.

That’s close to a 60/40 split in favour of growth.

The late 1990s were spectacular for growth investing as enthusiasm for technology and the internet swept through markets.

Then the dot-com bubble burst, kicking off a remarkable period which saw value outperform growth for seven consecutive years through 2006.

The pendulum eventually swung back decisively.

The years following the global financial crisis were very favourable for growth companies.

Inflation was subdued, interest rates were exceptionally low and some tech companies developed into enormously profitable businesses.

Since the end of 2009, growth has returned 16.2 per cent annually, compared with 12.0 per cent for value.

The pandemic turbocharged the trend even further, with growth returning 33.5 per cent in 2020 compared with just 1.4 per cent for value.

Then came another reversal.

Inflation surged to a multi-decade high, central banks were forced to raise interest rates aggressively and bond yields increased too.

Higher interest rates can hurt highly valued growth companies, because much of their value comes from profits that are expected to arrive some way into the future.

A higher risk-free rate increases the opportunity cost of waiting for those more distant cash flows, reducing what investors are willing to pay for them today.

Growth fell 29.4 per cent in 2022, compared with a modest 5.2 per cent decline for value.

However, growth quickly regained the upper hand as enthusiasm for artificial intelligence took hold very late that year.

It outperformed again in 2023, beating value by some 24 percentage points in 2024 and another nine points last year.

Almost eight months in, 2026 has been more balanced. Growth has returned 14.0 per cent, value 12.9 per cent and the overall S&P 500 13.5 per cent.

More recently, value has had a slight edge.

Over the latest three months it has returned 4.6 per cent, compared with growth which is down marginally.

Tech sector earnings remain strong, and enthusiasm about artificial intelligence is still high.

However, investors have also become more sensitive to valuations, while higher long-term interest rates have put the spotlight back on what we’re paying for future growth.

Another important point is that growth and value aren’t permanent labels attached to a company for life.

Index provider FTSE Russell assesses companies using measures of valuation and growth, and its latest review produced some fascinating results.

NVIDIA and Tesla remain 100 per cent growth stocks, while Berkshire Hathaway is 100 per cent value.

However, Apple and Microsoft are both considered close to a 50/50 split between growth and value.

Amazon is even more interesting.

Last year it was 73 per cent growth and 27 per cent value, but 12 months later that’s reversed and it’s now classified as 92 per cent value.

In fact, Amazon is the largest constituent in the Russell 1000 Value Index with a weighting of seven per cent.

In contrast, Caterpillar – the century-old maker of bulldozers and excavators – has shifted firmly into the growth bucket today.

The lesson is don’t get too hung up about what’s on the sticker.

A company can develop value characteristics if its share price looks attractive relative to its fundamentals, while a more mature business can develop growth characteristics if its earnings prospects improve.

The most attractive companies might be those which offer a bit of both.

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