The Valuation of Growth vs Value

By using our database of 75 months of data on over 500 US equities, we can analyze the top and bottom quartiles of Growth and Value respectively. The first graph shows the average Valuation Return or Risk (VR) for each of the top quartile of growth (as measured by the Reinvestment Return) and the bottom quartile of value (as measured by Payback), by month, as shown below.

The divergence in value between high growth and low payback stocks takes place over a protracted period from the spring of 2007 to the end of 2008.  This can be seen in the relative performance of the indices below.  In May '07 the two are equal at 93 approximately.  There followed a relative gain of 22% for the growth stocks and a relative decline of 35% for low payback stocks for a divergence of close to 60%!

Referring to the first graph, our valuation favors low payback vs growth by +46% to +21%.  The median values are slightly further apart (+46 and +17).