Viewpoints
Isn't it time to find real value in growth?

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Yana S. Barton, CFACo-Director of Growth Equity, Eaton Vance Management and Lewis R. PiantedosiCo-Director of Growth Equity, Eaton Vance Management

      Boston - Let's address the elephant in the room: In the equity space, growth has outperformed value, as characterized by the relative performance of the Russell 1000 Growth (R1G) and Russell 1000 Value (R1V) indexes for periods ranging from year-to-date through trailing 10 years. The same also holds true for small-cap stock indexes.

      With the equity market's ongoing ascent higher on the heels of waning recessionary fears and waxing trade resolution hopes, calls for rotation away from growth into value are getting louder. In fact, one could make the argument that value over growth posturing is the consensus call at this point. But not so fast...

      Not all growth is created equal

      Through November 15, the R1G Index is up over 29% year-to-date, but less than 35% of the companies comprising that index have bested those returns. In fact, more R1G constituents underperformed the index than those comprising the R1V (44%) or the S&P 500 Index (45%). This means that more so-called growth stocks have lagged.

      We think it's important to remember that growth and value designations are nothing more than someone's opinion of historic attributes deemed value- or- growth-like. The problem with letting such style classifications dominate the conversation is that inevitably — and somewhat unfortunately — it leads to the presumption that growth and value can't coexist. On the contrary, approximately 300 stocks are found in both R1G and R1V indexes.

      Value in growth... the real kind

      In typical market environments, investors are willing to pay more for faster growth. In the current environment shrouded in fear and uncertainty, however, investors have chosen to put a premium on slower growth "safety" stocks while shunning real growth. We think this has created an opportunity for finding real value among growth stocks.

      Based on current analysts' expectations, we anticipate that investors may pay less for more growth in 2020, rather than the other way around. As demonstrated by the 2020 EPS growth and PEG multiples1 chart below, an investor is expected to pay 1.5 P/E points for 1% EPS growth for a company within the communication services sector vs. 3.9 P/E points for 1% growth for a company within the utilities sector. The same paradigm of higher growth at a lower multiple holds true across other higher growth sectors.

      Investors may pay less for more growth in 2020 EPSgrowthPEGmultiples680pxSource: FactSet, Eaton Vance equity research, analysts' expectations for the S&P 500 Index as of November 15, 2019.

      Bottom line: Putting it all together, we think there's value in growth... Just another reminder that style picking is a tricky endeavor, which is why we focus on stock picking. As Warren Buffett famously stated, "Price is what you pay, value is what you get." That's why we continue to see plenty of value for equity investors who can be patient and selective.