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Is it time for investors to focus on growth stocks over value?

While there may have been signs of a pivot back towards growth stocks over the third quarter of 2022, value stocks look likely to remain the safest play for the foreseeable future. Yet there may still be opportunities in some growth stocks during the current bear market, while the cybersecurity space is one sector that could offer long-term growth-investing opportunities.

While there may be some signs of a pivot back towards growth stocks over the third quarter of 2022, value stocks look likely to remain the safest bet for the foreseeable future. That said, there may still be some growth stock opportunities available in the current bear market, with one potential long-term growth prospect being the cybersecurity space.

The overall decline in growth stocks has been widespread, whereas certain value stocks have outperformed, not least energy stocks, while defensive stocks like utilities and consumer staples have displayed typical resilience in a downturn. Morningstar points out that financials and industrials have suffered more in the value investing space, with investors concerned about a recession.

After growth stocks’ outperformance over the last decade, value stocks are now relatively cheaper than at any other time in US history, according to analyst Mark J Hulbert, reports MarketWatch. The widely-held view that value investing tends to beat growth investing only in scenarios where inflation is rising, “started to break down in mid-August”, says Hulbert, who says that the fact value stocks have broken a correlation with inflation expectations indicates “they have staying power”. 

Are growth stocks making a comeback?

Growth stocks made a comeback in the third quarter of 2022, but the trend isn’t likely to continue,  according to Investment Metrics, Institutional Investor has reported. Part of the reason growth investing outperformed value in Q3 is down to an expectation that US interest rates were peaking, says Steve Reid, at Investment Metrics. However, US inflation data for September dented expectations. Reid said: “The September inflation numbers ended up still being close to the record high. They weren’t coming down as fast as investors had hoped.”

Bearing out growth stocks’ mini comeback, the SPDR Portfolio S&P 500 Growth ETF [SPYG], whose constituents include Apple [APPL], Microsoft [MSFT], Amazon [AMZN], Tesla [TSLA], Alphabet [GOOGL] and Meta Platforms [META], gained 6.71% between 1 July and 30 September. This compares favourably with the 2.88% gain over the same period from the SPDR Portfolio S&P 500 Value ETF [SPYV], which comprises Berkshire Hathaway [BRK], Johnson & Johnson [JNJ], Exxon Mobil [XOM] and Procter & Gamble [PG] among its top-weighted stocks. Over the last month though, the SPYG has slipped -1.31%, while the SPYV is up 1.27%.

Value stocks have outperformed growth equities in seven of the past nine months, according to Investment Metrics’ data. Reid says this is because “rising interest rates and bond yields do not favour growth stocks, [as] capital-intensive growth projects are now more expensive to finance.” In contrast, he reasons that “value stocks generally have a stronger cashflow profile and tend to outperform [in economic downturns].”

Goldman Sachs’ potential growth- and value-investing stocks

Goldman Sachs said in a recent note that it sees attractive opportunities across both growth and value US stocks, despite what it says remains an unattractive risk-reward market at play, report Bloomberg. Noting a wide “degree of valuation dispersion within the equity market”, the investment bank sees opportunities in stocks that are generating faster cashflow and profitable growth, as well as cyclical and value stocks.

Among its profitable growth stock “bargains”, Goldman highlights biotech firm Exelixis [EXEL] and Meta Platforms. The note also says retail giant Macy’s [M] and carmaker General Motors [GM] are among the value stocks generating faster cashflow versus its peers. Among cyclical stocks showing value, and that could be poised to prosper in a recession, it highlights builders PulteGroup [PHM] and Toll Brothers [TOL].

Cybersecurity could offer growth stocks potential

The software-as-a-service (SaaS) model adopted by many cybersecurity companies means customers subscribe to a particular product or service, with an average retention of five to seven years, according to WisdomTree Investments’ head of research Christopher Gannatti, as reported by Seeking Alpha. Customers not only continue to use SaaS, they also tend to spend more and take on additional products. Gannatti says that “even if today’s narrative is all about profitability over growth, in the SaaS space, growth is still important”.

Cybersecurity stocks haven’t escaped the current tough period for growth investing – the CyberSecurity theme on CMC Markets’ ETF screener, represented by the First Trust Nasdaq Cybersecurity UCITS ETF [CIBR], is down -25.88% over the last 12 months – but Gannatti see potential in the sector, saying “the decreased valuations that we see now compared to one year ago could be a more interesting point of entry for anyone with a longer-term thesis on this important theme”.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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