A new study from the research firm Grantham Mayo Van Otterloo (GMO) shows that the erosion of the value premium over the last decade was due to “changes in relative valuations that favored growth over value, but now value stocks are priced attractively.” This according to an article in Advisor Perspectives.
Relative valuations, the article explains, “refer to the difference in metrics, such as price-to-book ratios, between value and growth stocks.”
The article reports that the GMO research team analyzed the gap in growth rates of value companies relative to the market, noting that while value companies have traditionally demonstrated slower growth in book values, sales and gross profits, “there is no indication that a structural shift has occurred that has disproportionately hurt cheap stocks’ historical growth.”
GMO also studied whether the quality of value stocks has suffered, but the report stated that it is on par with that of the broader market and “all in all, growth does not seem to be any more of an issue for value stocks than it has ever been. Though cheap companies grow less than the market, this is not a new phenomenon.”
The study concluded: “The main headwind for value as a group over the past 13 years has been its widening discount, with valuations alone accounting for roughly 50% of the group’s performance deterioration during this period.” While relative valuations could widen more, however, the report says that historical evidence shows the odds favoring a premium on value stocks going forward.