BULLS & BEARS: Move over, value stocks; it's time for growth to shine

September 4, 2006

A comic named Irwin Corey, who calls himself the Professor, once said, "If we don't change direction soon, we'll end up where we're going."

You had better open up your statement and listen to the Professor, because where your stocks are going might not be where you want to end up. If you have a big position in a value stock, or value mutual fund, it's time to make some changes. It's time to increase your exposure to good, old U.S. growth stocks. In the last several years, domestic growth companies have been doing what they are supposed to do-and that is to grow.

According to Standard and Poor's, operating earnings for large-cap companies have grown 60 percent since 1999.

Just in case you don't remember, 1999 had a few memorable events.

Techies fretted over Y2K, the Rev. Jerry Falwell outed the Teletubby Tinky Winky, and U.S. corporations were firing on all cylinders, driving operating earnings to a mutliyear peak.

So now, seven years later, while the companies have been growing like no tomorrow, the shares of stocks that represent those same companies have been snoring like Rip Van Winkle.

We all know that, every now and then, stock prices take a nap for a few years.

But over a typical stretch of seven years, the snoring stops and stocks get up and go, giving the patient investor a double-digit average return and a double on his money. What's interesting, and lucky for you, is that average returns have been increasing since the dawn of the digital age.

In the 50 analog years from 1928 through 1978, big-company stocks gave investors an average seven-year return of 12.8 percent. In the following digital years, from 1978 through July 2006, large-cap stocks have cranked out 15.5 percent per year. Is the increase due to the productivity gains from computers, or is it due to global trade, or maybe the collapse of communism and the burgeoning global middle class? Yep ... all of the above.

Lately, though, stocks have been napping and have eked out only a measly 2-percent return over the last seven years.

The only reason there has been any gain is the rise of the stodgy, old value stocks.

During the last seven years, the oils, metals and other cyclical stocks have been on a tear while the growth stocks have battled narcolepsy.

The Russell 1000 Value Index has returned 6 percent annually the last seven years.

That 6 percent is pretty anemic, but way ahead of the Russell 1000 Growth index, which has lost 3 percent annually.

Market guru Steve Leuthold noted in his most recent monthly research piece that growth stocks have not been this cheap relative to value stocks since mid-1994.

Coincidentally, mid-1994 is when growth stocks regained their leadership from value stocks and restarted their engines, which culminated with the mother of all growthstock bull runs.

Open your statement and make a change for growth. Rip is starting to stir.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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