Apple and Microsoft Won’t Continue to Dazzle Investors

While many “hot” stocks are still in fashion, a new study by Research Affiliates argues that they haven’t “become permanently more profitable. So, value stocks should eventually outperform simply because their shares are cheaper.” This according to a recent Wall Street Journal article by columnist Jason Zweig.

The article reports that over the past year, stocks like Apple and Microsoft have returned 108% and 60%, respectively, “dwarfing the performance of value stocks.” But Research Affiliates chairman Rob Arnott says the trend won’t last forever: “People always pay more for growth than for value. But when they get too carried away, then higher past returns will presage lower future returns.”

The RA study found that although value companies are not unusually cheap relative to their own earnings, they are the cheapest they’ve ever been compared with growth companies. Zweig writes, “Financial logic says cheap stocks should ultimately earn higher returns than expensive ones; the less you pay for a piece of the future, the more you will earn in the end. Emotional logic, however, says investors will often overpay for excitement.”

According to Arnott, when value becomes this cheap relative to growth, “the odds of it succeeding in the future go up drastically.”

Zweig concludes that although it can be tough for value investors to sit by and watch growth stocks continue to enjoy gains, “sooner or later, value investors will be getting the applause.”