Favor Value Over Chasing Growth

 | Mar 31, 2014 | 1:00 PM EDT
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This column is dedicated to those investors who tend to go after fast-growth, fast-moving stock prices, regardless of valuation. To me, growth and value are two sides of the same coin. But over the past five years, this bull market has seen the return of the aggressive investor. So far, risk has been rewarded, but we know that no party lasts forever.

And this party is in full swing. The tap has been flowing and investor psyche is jubilant with a feeling of near invincibility. Consider that King Digital Entertainment (KING), known for Candy Crush Saga, a mindless video game of matching colorful objects, today commands a valuation of nearly $6 billion. The market values King Digital at twice the value of Cracker Barrel (CBRL), a restaurant chain with more than 600 locations.

Airbnb, a private company that allows folks to turn their extra rooms into rentals, recently closed a financing round that valued the company at $10 billion. Keep in mind that Airbnb owns no property, rather it provides a portal that connects those who have rooms to rent with those want to rent rooms. At that valuation, Airbnb is worth more than Hyatt Hotels (H). Twitter's (TWTR) current valuation is nearly equal to that of Deere (DE), one of the largest agricultural-equipment companies in the world.

Indeed, it is beginning to smell a lot like past bubbles -- 1999 immediately comes to mind -- yet there is one crucial difference: value stocks continue to exist.

In 1999, not only were Cisco (CSCO) and Amazon (AMZN) trading at triple-digit price-to-earnings ratios, but names like Wal-Mart (WMT) were trading for 40x earnings. That type of bubble isn't here yet, but if that is where we are headed, then owning today's "value" propositions will be very rewarding. If not, you are still likely to do well owning cash-generating, slower-growing businesses than high-growth dream stocks.

Last week, in a blink of an eye, the market saw Netflix (NFLX) and Facebook (FB) shares drop more than 10%, respectively, while the S&P 500 fell by just under 1%. On the other hand, valuation held its own: Chesapeake Energy (CHK) was up 3%, Microsoft (MSFT) was down 0.2%, and Cisco was up 2.8%, respectively.

Clearly, a week's worth of data is nothing to hang a theory or opinion on; nonetheless, what is happening in the market is part of a playbook that has played out repeatedly. At some point, the excitement surrounding growth and story stocks will come back to reality. And when it does (consider last week a modest signal), the downward move will be swift and severe. Take time to contemplate what you are actually buying and what valuation you are accepting. Perhaps so-called value stocks really do offer the most value today.

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