Seeding a Growth Portfolio

As winter yields to spring, the market may be entering a season of outperformance for growth stocks

In the long-running race between growth and value stocks, growth has started to sprint ahead. Growth stocks have outperformed value issues for the past four months, according to the relative performance of the S&P 500/Citigroup Pure Growth and Pure Value indices.

Standard & Poor’s launched these two indices in September to give investors a better read on the relative performance of growth vs. value. Stocks in the Pure Growth index have exhibited strong five-year profit, sales, and internal growth rates. The Pure Value index contains stocks that pay dividends and are attractive on three valuation ratios: price to book value, price to cash flow, and price to sales.

Using the old methodology, in which the differentiating factor was just price-to-book ratios, value stocks outperformed growth issues 55% of the time in the 31 years since 1974. What’s more, value stocks delivered a compound annual growth rate of 9.9% vs. 9.6% for growth. And value stocks have a lower standard deviation, a common measure of risk.

Neverthless, as the Byrds sang, “To everything, there is a season.” S&P Chief Investment Strategist Sam Stovall believes now is the season for growth. Our analysts predict better earnings gains for growth stocks, while they expect profits for value stocks to slip slightly this year. Also, growth stocks have a lower p-e ratio than value stocks right now. And there are more four- and five-STARS recommendations, proportionately, among growth stocks than value.

Our strong buy recommendations in the Pure Growth index include Capital One (COF); recent price: $88), Coach (COH; $36), Colgate-Palmolive (CL; $55), Danaher (DHR; $59), Electronic Arts (ERTS, $52), Eli Lilly (LLY, $56), Home Depot (HD, $42), Johnson & Johnson (JNJ), $59), Kohl’s (KSS, $46), Microsoft (MSFT, $27), Mylan Labs (MYL, $23), Nabors Industries (NBR, $70), PepsiCo (PEP, $59), Procter & Gamble (PG; $60), UnitedHealth Group (UNH; $58), Valero Energy (VLO; $55), Wal-Mart (WMT; $46), and Wrigley (WWY; $64).

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