Investors have been fighting over whether growth or value stocks are better for as long as I can remember. And as the calendar turns the page to 2018, the age-old debate has found its way back into the headlines.
Growth stocks won out last year, with the S&P 500 Growth Index raking in a 25.4% gain compared to the value index’s return of just 12.7%. And growth has continued to outpace its value counterpart through the first two trading weeks of the New Year.
I’m not the biggest fan of this debate. I prefer to focus on specific stocks and their individual potential rather than whether a stock is growth or value.
Looking out over the next 12 months, however, I can make the case for both groups of stocks.
Boiling The Growth Or Value Debate Down To Allocations
Let’s start with value stocks. These stocks trade at better valuations than growth stocks — which is typical. I also think they still have the ability to put in another double-digit gain in 2018.
Many investors probably think of the REITs and utilities when they think of value. But these two sectors actually only make up 7.5% of the S&P 500 Value Index. Instead, the Value Index focuses heavily on the financials and energy stocks, which make up 39% of the allocation.
The financials are undervalued on a fundamental basis, as they are once again starting to offer decent dividends and are thriving in the rising interest rate environment. As for energy, oil is breaking out and it doesn’t appear to be slowing down thanks to the strong global growth.
The growth index, on the other hand, has a much higher weighting in the information technology sector, which makes up 40% of it on its own.
I love this space right now and I am confident that big tech will have another strong year in 2018. The FAANG group — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOGL) — once again leads the way.
Over the longer term, however, some of the smaller technology companies will ultimately start taking money away from the behemoths, which could hurt growth stocks.
The Bottom Line On Choosing Growth Or Value Stocks
In the end, both growth stocks and value stocks have their pros and cons. And both should also perform very well in the coming year.
I plan to invest in each group throughout 2018. If I had to choose just one, however, I’d lean toward value solely based on the sectors that it is more heavily focused on.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.
