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Go for Growth vs Value Investing – HSBC

September 29, 2009

Prefer growth investing over value style; better valuation and superior earnings
growth create a compelling proposition. Growth stocks are trading at a relative valuation that is lower than their historical level. The growth index is currently at a 12-month forward PE of 20.4x, while the value index is at 15.8x. The valuation premium of growth stocks, at 1.3x, is in fact one standard deviation below its five-year average.

From March 1997 to June 2009, the EPS of growth stocks grew at a CAGR of 13.5% compared to 7.8% in the case of value stocks. In the last two years, the performance of growth stocks lagged that of value stocks, as EPS growth of the former lagged that of the latter. Looking ahead, analysts forecast a turnaround, marked by growth stocks growing earnings at a CAGR of 22.5% versus value stocks at 17.5% over FY2010-12e. Overall, in this period, their EPS grew at a CAGR of 11%.

Some of the Overweight growth stocks are ITC, HDFC Bank and BHEL.

Performance of Growth Stocks vs Value Stocks in a Decade

Performance during Rally

Start End Value Growth
Jan-97 Aug-97 39.7 39.2
Oct-98 Feb-00 55.6 168.8
Sep-01 Feb-02 53.5 38.2
Oct-02 Jan-04 148.4 80.2
May-04 May-06 206.4 168.7
Jun-06 Feb-07 63.0 74.5
Mar-07 Jan-08 95.7 60.1
Mar-09 Sep-09 111.5 100.1

Performance during Correction

Start End Value Growth
Aug-97 Oct-98 -41.8 -3.9
Feb-00 Sep-01 -46.7 -58.3
Feb-02 Oct-02 -22.4 -20.0
Jan-04 May-04 -29.9 -25.7
May-06 Jun-06 -31.6 -28.7
Feb-07 Mar-07 -15.1 -16.6
Jan-08 Mar-09 -60.8 -67.3

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