Summary
- Late-stage bull markets, which I think we are currently in, tend to be a boon for growth stocks for a number of reasons.
- Many parts of value stocks are also in massive disruption in the Auto sector (CARZ), Utilities (XLU), and Financials (XLF).
- Quality growth stocks like Alphabet, Microsoft, and Humana garner a look in your portfolio.
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Move fast and break things. - Mark Zuckerberg
As I mentioned this week in The Lead-Lag Report, I think we are clearly entering the later stage of a cyclical bull market. That means that you should be shifting your portfolio to hold more growth stocks if you can stomach some volatility. In this late-stage bull market, the cost of equity (equity risk premium + risk-free rate) has some room to fall which is more beneficial to growth stocks than value.
When the discount rate falls, long-duration assets like growth companies tend to re-rate, as the bulk of their earnings are further into the future. In addition, valuations of growth companies are still reasonable despite outperforming value companies for many years. Trailing P/E sits around 28x, compared to pre-bubble valuations of 45-70x. You can easily tilt your portfolio to growth using Vanguard Growth ETF (VUG) before it is too late.
Another reason to shy away from value companies is the amount of disruption that is happening right now. Just look at the Auto sector (Tesla [TSLA] anyone?). Not only are auto manufacturers being disrupted by the push to electric vehicles, but they are also affected by autonomous driving and car-sharing (UBER, LYFT). They are also battling tech entrants like Waymo which is owned by Alphabet (GOOG) (NASDAQ:GOOGL) and a host of China tech companies.
An additional sub-sector being disrupted is utilities, with disruption from renewables, better battery storage, and smart metering. And what part of financials aren't being disrupted right now? Key business areas of banks like asset management (think: ETFs), payment systems, loan origination, and investment banks are being increasingly disrupted. A recent stat from the Netherlands showed that approximately 40% of new mortgages come from non-banks.
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This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.
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