Client Portals

Rethinking The Growth vs Value Debate5 min read

Apr 21, 2021 - Max Osbon ( 7 mins to read)

Value vs. growth is a long-standing debate within the investment profession. For decades, growth critics have pointed to outrageous valuations while voicing uncertainty about future growth prospects. On the other hand, value critics have argued that it’s worth paying higher prices for leading-edge businesses. Over the last year, this debate has become the topic du jour and both parties acknowledge that the answer includes a mixture of both philosophies. Here are some considerations:

Own great companies

Great businesses share similar qualities: a first-rate management team, a strong balance sheet, opportunities for productive reinvestment of capital, and durable competitive advantages. There are great businesses in both the value and the growth classifications. 

I would argue, however, that the key to the success of the growth factor in the last decade has been its ability to productively reinvest capital into rapid innovation cycles. There are more companies in the growth factor that rely on code and engineering activities. Code-based companies are often asset-light and able to scale farther and faster to bigger networks than non-code business models.

The value factor has excluded leading companies like Facebook, Microsoft, Google, Amazon, etc, due to their valuation. This approach missed the tech boom almost entirely. However, famous value investors like Seth Klarman and Warren Buffet own these companies today, marking a shift in how value and growth are defined.

We wrote in the Triumph of Intangible Assets that brand, supply chains, access to data, patents, etc. make it more difficult than ever to apply a concrete valuation. Today’s great companies have large portions of their value in intangible assets. Not everything that counts can be counted.

For protection of assets, growth won in 2020 because it recovered first.

When a market crashes, all daily market prices fall together as liquidity becomes scarce. What’s important as you enter a crash is that you hold assets that will recover quickly in the recovery. There’s no question that in March of 2020, growth assets recovered far faster than their value counterparts. 

Google, Facebook, Amazon, and any number of cloud computing or semiconductor companies accelerated as their businesses are based on technical talent and revenues that were healthy and growing prior to the pandemic. After a crash, healthy high potential businesses recover first.

For 2021 so far, value is mostly in the lead. 

The energy sector, the banking sector, cruise lines, airlines and restaurants have been notable winners so far in 2021. This is known as the COVID recovery trade. For long term investors, many of these business are still well below pre-COVID highs. The recovery trade hasn’t been the only winner as the semiconductor industry has continued its momentum from last year. Semiconductors have a natural consistent tailwind as almost every modern tool or task involves some form of integrated circuit.

Don’t fight the Fed

Shifting to the bigger picture for a moment, we all need to thank Jerome Powell and company for leading the way on keeping the global economy out of a major prolonged depression. Over the past year, +$12 Trillion in COVID-related stimulus has been approved by the Federal Government. $6T was allocated to supply liquidity to markets, and we’ve used about $3T so far. The other $6T was allocated to direct stimulus spending in the form of grants, tax deferrals and direct income support, and we’ve used about $4.2T so far. 

For context, US GDP in 2019 was $21.4T. On top of that stimulus, interest rates were cut from 1.5% to 0%. International central banks have followed a similar path.

The US Government still has access to another $4.8T to support our economy until COVID is fully under control. Under control means we have a fully functional hospital system without backlogs in the ICU, vaccinations are widely available and lockdowns are not in effect in the US or neighboring countries. One consideration for investors, there are no rules or laws against creating more stimulus if it’s needed over the coming 12 months.

In short, the primary investment factor of the past year was government stimulus. Without it, we would be in a very different situation. Don’t fight the Fed.

High growth businesses are often acquired

The world’s most successful firms rely on acquisition to achieve their strategic goals. LinkedIn was acquired by Microsoft and is a tremendous network business today.

YouTube was a fantastic opportunity for Google when they acquired them for $1.65B in 2008. Today YouTube generates $1.65B in ad revenue for Google every three weeks. There is no financial model that would have projected that result.

Livongo – one of my favorite growth health tech companies, was acquired last year by Teladoc. Prior to the acquisition it was growing revenue at well over 100% year over year. You can’t own it today without owning all of Teladoc as well, which is also a great company, but not quite as impressive as Livongo was on its own.

 Intel acquired autonomous vehicle pioneer MobileEye back in 2017, which today is expected to be a major contributor to Intel’s future. Recently Microsoft announced their acquisition of Nuance, a pioneer in conversational AI tools whose stock price soared last year.

Growing businesses with exceptional talent often get acquired. They also tend to trade at higher multiples.

In short…

Entry point, the price you pay when you buy, plays a huge role in both value and growth investing. The lines between the two camps are continuing to blur as technology and innovation find their way into more business models. A high valuation doesn’t mean a company is overpriced, and a low price doesn’t mean a company is undervalued. Investors should seek to own great businesses with rock solid management teams, competitive advantages, healthy balance sheets and continuous opportunities to reinvest capital over time.

delivered to your inbox


This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.