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As far as investing styles go, growth has been the most popular choice since 1995. In fact, growth stock pickers-the portfolio managers who scout the market for companies with rising profits and sales-couldn’t have asked for a better economic backdrop than the latter half of the ’90s. A booming economy kept corporate earnings, the bounty growth managers cherish, surging as high as 20% annually. Low inflation helped keep money flowing into the stock market. And newspaper headlines seemed to spotlight massive mergers and acquisitions daily.
Add it all up and you have a paradise for growth investors. For proof, look at the Standard & Poor’s Barra indices for both growth and value, widely accepted as the benchmarks for both investing camps. Since 1995, the S&P Barra Growth Index has had an average annualized return of 29.7%, vs. 20.9% for the S&P Barra Value Index. For example, in 1997 the Growth Index had a total return of 36.53%, compared with the Value Index’s return of 29.99%. In 1998, however, the Growth Index catapulted to a 42.16% total return, walloping the 14.68% Value mustered the same year. You could also think of it this way: a $1,000 investment in 1995 in the S&P Growth Index would now be worth $3,324; that same amount would be worth $2,717 if you invested in the S&P Value Index-a respectable sum, but still second best.
To find the reasons that growth stocks have come out winners, look no further than a lineup of companies and industries that portfolio managers in the camp have come to love. Start with high-tech industries such as computers, networking hardware and telecommunications equipment. There, companies like Dell Computers (Nasdaq: DELL) (up 6,000% since the start of 1995), Cisco Systems (Nasdaq: CSCO) (up 1,595% since 1995) and Lucent Technologies (NYSE: LU) (up 786% since being spun off from AT&T [NYSE: T] in 1996) have all reaped humongous share price gains as the personal computer and the Internet have become integral to people’s lives.
And thanks to major breakthroughs and blockbuster treatments for depression and impotence, pharmaceutical companies have also been quite good to growth managers. Over the last four years, Johnson & Johnson (NYSE: JNJ), Merck (NYSE: MRK) and Pfizer (NYSE: PFE), for instance, have reaped gains of 284%, 321% and 505%, respectively.
That’s not to say that growth investing has conquered the world, or that value investing as a school should be placed on life support, as some articles in the financial press suggested earlier this year. Some of the best growth portfolio managers will tell you that every style eventually has its season in the sun.
“Over the past few years, growth has done phenomenally well,” says Lou Holland, who manages $750 million in assets for his firm, Holland Capital Management, in Chicago. “We seasoned veterans know, however, that growth stocks and the market in general have risen so much that it’s hard to find cheap stocks these days.”
Indeed, through May 30 of this year, value seemed to be making a comeback, with the