Who is winning in 2022 ?

Price is what you pay for, value is what you get”. This well-known comment from the legendary investor Warren Buffet captures the essence of the value investing philosophy and provides the key to how Buffet amassed his wealth. Warren buffet being the icon of “value investors” has built a stupendous amount of wealth by practising disciplined value investing over years. Value investors believe that you are more likely to find undervaluation of assets in place and tend to invest in mature firms with substantial existing assets, albeit underperforming ones. 

Value is very difficult to find in inflated markets and can only be seen when the markets have been sharply corrected. Bull market conditions make value investing look pointless. The value investing strategy will prepare investors for market corrections because undervalued stocks do not experience them. Value investment has the potential to perform better over the long run. A lengthier time might easily extend to intervals of more than five years. 

However, if Warren Buffet is the icon for value investors, Peter Lynch occupies a similar position for growth investors. “Whenever you invest in any company, you are looking for its market capitalisation to rise. This can’t happen unless buyers are paying higher prices for the shares, making your investment more valuable.” This thesis by Peter Lynch completely stands on the opposite side of what value investing believes in. Growth investors are animated with the belief that growth too can be under-priced in some companies, and that the payoff to seeking out these bargains in growth is sufficient to justify the costs.

Peter Lynch’s reputation was made during his stewardship of Fidelity Magellan, a small high-growth fund that he took over in 1977 and made into the largest equity mutual fund in the world over the next decade. The reason for its growth was its performance. An investment of USD 10,000 in the Magellan fund would have grown 20-fold over the next 10 years. Many services define a growth investor as one who buys stocks that trade at high multiples of earnings. Though this may be a convenient way to categorize investors, it is not an accurate one. In fact, it leaves us with a misleading picture of growth investors as being uninterested in the value of what they are buying. 

While this may be true for some growth investors, does anyone really believe that Peter Lynch cares less about value than Warren Buffett does? Warren buffet despite being allergic to tech companies for the longest time has APPLE as his biggest investment. History shows that growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first ones to punish when the economy is cooling. Value stocks, on the other hand, may do well early in an economic recovery but are typically more likely to lag in a sustained bull market. 

Performance of Value Stocks versus Growth Stocks in 2022 Note: For discussion purposes, we have assumed value stocks to have a TTM PE of less than 10 and growth stocks to have a TTM PE of more than 100.

Speaking of the global markets, many of the indices took significant losses and have produced negative YTD results with the Dow Jones losing 7.76 per cent of its value while the other indexes such as the S & P 500 value index losing 6.01 per cent and the S & P 500 growth index losing 26.33 per cent. The markets have been extremely erratic this year. The geopolitical crises, jarring swings in the price of commodities, large swings in the price of crude oil, and rate hikes by the Federal Reserve and banks have all contributed to the volatility to some extent. Despite all of this, the Indian stock market has provided relief to all investors worldwide, with the Sensex returning 3.4 per cent on a year-to-date basis.

When it comes to market trends in India this year, we have seen significant outperformance from value stocks when compared to the BSE Sensex, with PSU banks leading the way to produce notable returns and Nifty PSU Bank producing a staggering 53.98 per cent year-to-date. On a YTD basis, some of the notable PSU banks in the value segment (TTM PE < 10) have produced extraordinary returns, including Karur Vysya Bank Ltd. and The Karnataka Bank Ltd., giving 124.42 per cent and 124.37 per cent, respectively, whilst Bank of Baroda and Indian Bank have given 98.66 per cent and 96.63 per cent, respectively. 

Another sector in the value segment which caught the eyes of investors and gave massive returns was the paper sector. West Coast Paper Mills Ltd., Sangal Papers Ltd., Tamil Nadu Newsprint and Papers Ltd. and JK Paper Ltd. are one of the few names which skyrocketed and gave 100 per cent plus returns with West Coast Paper Mills topping the list with 149.57 per cent returns on a YTD basis. 

Speaking about the growth segment (TTM PE > 100), the Adani Group stocks such as Adani Enterprises Ltd., Adani Total Gas Ltd., Adani Transmission Ltd. and Adani Green Energy Ltd. showed massive momentum with Adani Enterprises providing the largest return of all four at 135.28 per cent. On a year-to-date basis, the hospitality sector's equities also showed strong growth due to increased bookings and consumer expenditure on both food and travel.

We at DSIJ back-tested all the 5,934 stocks listed on BSE. Based on YTD returns and TTM PE, we found that out of all value stocks with TTM PE of less than 10, as many as 281 companies outperformed BSE Sensex while out of high growth stocks with TTM PE of more than 100, up to 87 companies outperformed the BSE Sensex. As per the data, out of the 806 value stocks, close to 281 managed to beat the BSE Sensex (assuming that value stocks are defined as those that trade with a PE of less than 10). That is a respectable 35 per cent of value stocks that have so far outperformed the BSE Sensex in 2022. 

At the same time, we note that at least 318 growth stocks are currently trading at a PE of greater than 100 (this is with the assumption of growth stocks as stocks with a PE greater than 100). We discover that out of 318 growth stocks, at least 87 of them outperformed the BSE Sensex by a significant margin exhibiting that 27 per cent of growth stocks were able to surpass the BSE Sensex. Thus, what we observe from this data is that the probability of value stocks outperforming the BSE Sensex was higher than the growth stocks outperforming the BSE Sensex in 2022. 

When comparing the long-term performance of the two approaches, neither the growth nor the value strategy shines out as a definite winner in terms of wealth creation. According to the aforementioned data, growth companies do, on average, outperform value stocks by a slight margin when the economy is doing well. Value stocks, on the other hand, are the ones that actually shine and provide comfort to investors amid the harsh winds when the economy is in a slump.

Your portfolio may perform best if it has exposure to both growth and value stocks. The inherent relationship between the two tactics was correctly noted by Warren Buffett. In his renowned 1992 Berkshire Hathaway letter to shareholders, Buffett stated, “In our view, these two techniques are connected at the hip: growth is always a component of the calculation of value, constituting a variable whose relevance might range from small to tremendous."