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Can value shares catch up to 'glamour' growth stocks like Netflix?

Michael Santoli
·Michael Santoli

The reported intention of China’s state-backed Tsinhgua Unigroup to bid some $23 billion for Micron Technology Inc. (MU) has triggered buzz and debate across a few different fronts.

Would a Chinese company be permitted to acquire the last U.S. core memory-chip maker?

Does this gambit undermine the popular idea that the semiconductor industry was settling into a calm middle age?

And how fitting that reports of the expected bid for Micron came just hours after widely followed hedge fund manager David Einhorn predicted in his investor letter that Micron was undervalued and some time soon would again be worth more than the cult-favorite Netflix Inc. (NFLX) – which Einhorn says is overvalued even as it under-delivers financial results.

But a less-discussed question related to Einhorn’s call is whether a private bidder’s apparent interest in Micron after its shares have been cut in half this year is whether it suggests the lopsided dominance of growth stocks over value stocks might be nearing a reversal.

The market has flocked to a relatively select roster of glamour growth stocks over the past year or two in the technology, consumer, media and healthcare industries, preferring the elite companies that enjoy fast organic growth in a tepid economic-growth cycle. A look at the new-high list following Monday’s market rally shows this trend, featuring such names as Facebook Inc. (FB), Amazon.com (AMZN), Nike Inc. (NKE), Under Armour Inc. (UA) and CVS Caremark Inc. (CVS), in addition to Netflix.

Such stocks have premium valuations, are considered best-in-class and must hurdle high expectations to keep their shares aloft. A stock like Micron, by contrast, has been compressed to some 6-times earnings, about a third of the broad market multiple.

In the 12 months through June 30, the Russell 1000 Growth Index – tracked by the ETF under ticker IWF – returned 10.5%, a huge outperformance over the 4.1% delivered by its value-index counterpart, iShares Russell 1000 Value (IWD). This trouncing of value by growth has been going on for the past two years, and so far in July, that growth outperformance has only widened further.

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As always, there are plausible reasons for this divergence. The sector makeup of the value index has been a huge handicap, with about twice the energy-stock weighting of the growth version and a dramatic skew toward financial stocks, which only recently have perked up.

The value benchmark also is underweighted in consumer cyclical, tech and healthcare shares – two huge leadership groups in the past couple of years.

So why should anyone think that this overwhelming preference of fancy growth stocks over value names will reverse any time soon?

There’s no obvious catalyst for a sudden shift, but these styles drift in and out of favor over a market cycle, and the tendency of such patterns to revert to the mean now favors value names. Over the very long term, too, value stocks have always done a bit better than growth. Though some argue that this “value effect” has been over-exploited by quantitative investors in recent years, this isn’t yet clear.

More immediately, banks are getting a tailwind from higher interest-rate expectations, oil is possibly set up for a “buy on bad news” recovery on the Iran sanctions news and there are hints of an economic acceleration that would lift industrial fortunes.

This might not be enough to unseat the leading glamour growth names. But before too long, bargain hunters might have their day – even without a long-shot bid for their stocks by an opportunistic Chinese bidder.

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