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The Rotation from Growth to Value

By Justin McNichols, CFA
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The financial media has recently begun to focus on the ongoing rotation from U.S. growth stocks to U.S. value stocks. Specifically, a rotation out of high valuation, momentum growth companies. It’s interesting to note this rotation actually began to occur quietly in September – something we’ve been anticipating for a number of months now.

In our view, this comes as no surprise for a couple of reasons. First, as you can see in the chart below, the Russell 1000® Growth Index (green line) has dramatically outperformed the Russell 1000® Value Index (blue line) since 2011. In the bottom half of the chart (black line), you can see the P/E of the Russell 1000® Growth divided by the Russell 1000® Value. The valuation premium of growth over value has reached historic levels – levels not seen since the peak of the tech bubble in early 2000. Investors had been paying more than a 70% premium for U.S. growth over U.S. value. When valuation differentials become this extreme, it is generally only a matter of time before you see some “reversion to the mean”.

But more importantly, value stocks – particularly those that are most economically sensitive – are poised to be the largest beneficiaries of a normalizing economic environment post-COVID. When investors panicked out of stocks in the spring, economically sensitive companies (gaming, hospitality, travel, consumer discretionary) were hardest hit, creating enormous opportunities and excellent risk/reward profiles. We stated at the time that some of the purchases we were making in March and April of this year were better opportunities than many of the positions we purchased in the depths of the Financial Crisis in early 2009. We still believe that today.

Assuming progress on the vaccine front continues at its current torrid pace, we expect substantial continued outperformance by value over growth (particularly momentum growth) as the market discounts a much more robust economic recovery in 2021.

These shifts in market leadership all serve to emphasize the importance of having a style-agnostic approach. For over 80 years, Osborne Partners has utilized the same style-agnostic discipline of searching out superior risk/reward profiles, regardless of growth or value. This discipline has served our clients well through many different market environments and will continue to in the future.

Justin McNichols, CFA

Justin McNichols, CFA

Justin is the Chief Investment Officer for OPCM, and has over 25 years of experience. Justin is a member of the OPCM Investment Management Team, and became a principal of the firm in 2000. Justin is a member of CFA Society San Francisco and CFA Institute. Justin received a Bachelor of Arts degree in Economics in three years and a M.B.A. in Finance from the University of California at Irvine. Additionally, he is a CFA Charterholder.
The opinions expressed herein are strictly those of Osborne Partners Capital Management, LLC ("OPCM") as of the date of the material and is subject to change. None of the data presented herein constitutes a recommendation or solicitation to invest in any particular investment strategy and should not be relied upon in making an investment decision. There is no guarantee that the investment strategies presented herein will work under all market conditions and investors should evaluate their ability to invest for the long-term. Each investor should select asset classes for investment based on his/her own goals, time horizon and risk tolerance. The information contained in this report is for informational purposes only and should not be deemed investment advice. Although information has been obtained from and is based upon sources OPCM believes to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. Past performance is not indicative of future results. Inherent in any investment is the possibility of loss.