My Thoughts on Growth vs Value Stocks

By Sean Gavin, portfolio manager of Fidelity® Value Discovery Fund

Recently, the valuation gap between the most- and least-expensive stocks in the marketplace reached the widest level I’ve seen in my investing career — much bigger, in fact, than just before the internet bubble burst in early 2000.

Consider that growth stocks have outperformed value stocks for multiple years. Even after the broader market plunged in late February and the first half of March with the COVID-19 pandemic, growth stocks fared much better than value stocks and bounced back harder as the market recovered in the second half of March and into April and May. As a case in point, large-cap growth stocks returned 5.23% for the first five months of 2020, while large-cap value stocks were down -15.70% for the same time frame.

Wide valuation gaps like we’re currently seeing, however, don’t tend to remain this wide for long. They can narrow for lots of reasons, but most often, it’s because the market eventually works itself out. Think back to how the market behaved in 2000 and 2001 or following the 2007–08 financial crisis. As the economy began to bounce back, investors started to better understand value companies’ cash flow situation and therefore became more confident about how they should be priced. That led to value stocks beginning to significantly outperform the most richly valued growth-oriented firms.

Even though no one can predict the timing, I’m optimistic that a similar situation can occur this time too. We’re seeing many growth stocks rewarded entirely out of proportion to their long-term value, in my opinion. Against this backdrop, I believe my best course of action is to continue to follow my investment process, seeking to invest in the stocks of solid companies whose market valuations I believe are considerably lower than warranted.

Articles and posts are as of the date indicated, are for informational purposes only and are not intended to be investment advice or a recommendation of any particular security or investment strategy. The views expressed are subject to change and unless noted otherwise are those of the author and not necessarily those of Fidelity Investments.

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