How Long Will The Shift To Growth Stocks Continue?

There's been a big shift to growth stocks so far in 2017, as measured by the year-to-date performance of the large and small growth ETFs versus their value counterparts, as shown in the following table.


In some sense, this mean reversion (versus 2016) should come as no surprise as the dividend stocks that were once craved by risk-averse income-focused investors (e.g. the AT&T's and Verizon's of the world) are now being shunned in favor of aggressive-growth technology companies and emerging markets.

It seems the about-face has been driven by political and regulatory direction as the new administration continues to offer pro-growth aspirations, and the US Fed continues to raise interest rate expectations.

Also in mean reverting fashion, healthcare stocks have lurched higher this year as Washington's "repeal and replace" efforts have been put on hold for now (healthcare was the worst sector in 2016).

In our view, the Obamacare debate will bubble up again soon, and bring with it renewed volatility in the healthcare sector. However, we will again be ready with ideas such as those in our recent article titled: Gilead And 2 More High-Income Healthcare Opportunities. For example, the article offers stock-specific healthcare opportunities (OHI, HCN), including a couple that use options (HCN, GILD) to take advantage of fear and volatility in the sector, which will increase again just as soon as the healthcare debate bubbles back up in the news (so be ready). And along the same options volatility theme, we offer a couple more trading ideas in our article titled: Target Covered Calls? 3 Better Options for High Income.

Also along the same politically-driven investment opportunities, we offer an interesting idea in our recent article titled: CVR Energy: 10.2% Yield, Trump-To-Icahn 'Kickback' Pending. In this article we highlight the relationship between President Trump and Carl Icahn, and how Mr. Icahn may be using his political clout to add to his own personal profits. There is a very interesting opinion on this relationship in a recent Wall Street Journal article title: Icahn't Believe It's an Ethics Conflict.

Also, if you've just had it with higher-risk stocks in general, here are a couple recent articles highlighting attractive safe dividend stock ideas:

Value Stocks vs Growth Stocks

Returning to our value versus growth theme, here is a look at how the styles have performed since the great depression.

The key take away here is that value stocks (particularly small cap value stocks) have been the best performers over the long-term and across market cycles. Our above chart only goes through 2003, but here is a look at the same data in more recent years…

And again, the takeaway is the same… small cap value performs the best over the long-term across market cycles. And considering growth stocks have performed better so far this year, it's an even more attractive time to buy value stocks now (from a mean reversion standpoint). We're not saying that value stocks will immediately start performing better tomorrow. But we do believe value stocks will perform better over the long-term.

ETF Performance Table

Finally, for your consideration, here is our comprehensive ETF performance table…

In addition to value versus growth, other interesting contrarian opportunities right now include energy stocks (and oil) which are down 6.6% (and 9.2%) YTD. Also, one of our favorites, REITs are the second worst performing sector this year (and the third worst since the election). In our view, REITs are overly beat up and very attractive right now from a contrarian standpoint. You can read more about our REIT views in our recent article: 10 Big-Dividend REITs Worth Considering.

And the bottom line here is that if you believe in contrarian investing (like we do) then value stocks are always a good idea over the long-term, especially considering they're underperforming so far this year.

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