Oct. 5 (Bloomberg) -- U.S. growth stocks might finally grow faster than the value stocks that have beaten them every year since the Internet bubble burst in 2000.

Stocks with above-average sales and profit increases rose more last quarter than those with low prices relative to earnings. Growth stocks such as Cisco Systems Inc., the world's largest maker of computer-networking gear, and Procter & Gamble Co., the biggest U.S. consumer-products maker, look more attractive as the economy slows.

``There is a shift to growth stocks, and it's likely to last several years,'' said Daniel Boone, who helps oversee $8 billion as managing partner at Atlanta Capital Management LLC in Atlanta. ``We're probably in for a midcourse correction in the economy that should slow earnings growth and make growth companies more attractive.'' He owns Cisco shares.

The S&P 500/Citigroup Growth Index climbed 5.7 percent last quarter, beating the 4.7 percent rise in the S&P 500/Citigroup Value Index and the 5.2 percent gain of the broader Standard & Poor's 500 Index. Declines in industrial companies such as U.S. Steel Corp. and Caterpillar Inc. weighed on the value benchmark.

A survey released on Sept. 27 by Russell Investment Group suggested that the performance by growth stocks may extend into 2007. The Tacoma, Washington-based company's quarterly survey of investment managers said growth shares were the most favored domestic equity category.

Growth Versus Value

Picking between so-called growth and value has been critical to the performance of fund managers since the mid-1990s, when two long periods of divergence began.

Starting in 1994, the growth category beat value for six straight years as technology stocks surged. The growth index quadrupled from 1994 through the end of the decade, while the value index more than doubled in the same period.

The trend reversed after the S&P 500 peaked in March 2000. A slump in computer-related shares such as San Jose, California- based Cisco has helped drag down the growth gauge 29 percent this decade. The value index has risen 18 percent as investors gravitated to less risky investments.

``We've had such superior earnings growth that I don't need to pay up for growth,'' said Robert Doll, chief investment officer of global equities at BlackRock Inc., which oversees $1.05 trillion in New York. Now, with profit expansion about to decelerate, investors will favor the fastest-growing companies. ``That's the environment we're in now.''

Earnings Estimates

Earnings expansion at S&P 500 companies may slow to 11.8 percent this quarter from an estimated 14.1 percent in the July to September period, according to a Thomson Financial survey of analysts. Profits rose 16.3 percent in the second quarter.

A report last week showed that the U.S. economy grew at an annual rate of 2.6 percent in the second quarter as homebuilding slowed. The pace was slower than the Commerce Department's previous estimate of 2.9 percent, as well as the 5.6 percent pace in the first quarter.

Russell said 58 percent and 38 percent of managers surveyed were bullish on ``large-cap'' and ``mid-cap'' growth stocks, respectively.

``Most managers remain convinced that it is only a matter of time before large-cap growth stocks take off,'' wrote Erik Ristuben, a managing director at Russell, which oversees more than $171 billion. ``They point, too, to relatively low valuations among growth stocks as an indication that they are good buys at these levels.''

Cheaper Stocks

Stocks in the S&P 500 growth index trade on average at 18.7 times earnings for the past year. That compares with a high of 52.3 in September 2000 and an average price-to-earnings ratio of 25.3 in the past five years.

Cisco trades at 24.9 times earnings for the past year, compared with a ratio of 192.9 times in March 2000 and an average of 51 over the past 10 years. The company has averaged 15 percent annual sales growth over the past three fiscal years.

Procter & Gamble has had average profit growth of 25 percent in the past five years. The Cincinnati-based company trades at 23.7 times earnings, below a 10-year average of 25.7.

Growth stocks will have to rally further in the last three months of the year to avoid trailing value stocks for a seventh- straight year. The value index has climbed 11 percent this year, while the growth gauge has gained 5 percent.

Top-Ranked Stocks

A bullish stance on growth stocks in the Russell survey has been little guarantee the group will outperform. Large-cap growth stocks have been the top-ranked asset class since the firm began asking investors their preferences in June 2004.

And there have been false signs before of a turning point. Growth stocks beat value shares in the third and fourth quarters last year, only to underperform in the first half of 2006.

Still, the industries that led the S&P 500's rally to a 5 ½-year high last quarter suggest that investors may be placing an increasing premium on growth.

Cisco's 18 percent third-quarter rally helped send a gauge of technology stocks up 8.3 percent. P&G climbed 11 percent, while a measure of health-care companies including Pfizer Inc. added 9.8 percent for the biggest rally among 10 industry groups in the S&P 500.

Pfizer, the world's largest drugmaker, is the most heavily weighted stock in the growth index besides Exxon Mobil Corp. and Microsoft Corp.

Among the stocks that weighed on the value index, Peoria, Illinois-based Caterpillar, the world's largest maker of earthmoving equipment, lost 12 percent last quarter. U.S. Steel, the biggest U.S.-based steelmaker, slid 18 percent. Caterpillar sells for 13.5 times earnings and U.S. Steel trades for 7.8 times profit.

``More stable growth companies is where the market is going to focus, and I think the market is on the cusp of that,'' said Daniel Frascarelli, who helps manage about $1 billion at Lord, Abbett & Co. in Jersey City, New Jersey. ``When third- and fourth-quarter earnings numbers come in, we're going to get a clearer picture of where we're going.''

To contact the reporter on this story: Daniel Hauck in New York at dhauck1@bloomberg.net

Last Updated: October 4, 2006 19:05 EDT