With value stocks now outperforming growth stocks, Goldman Sachs recommends a strategy that captures the best of both worlds: growth at a reasonable price.
The firm used economic models to predict that value stocks will continue to outshine in the third quarter but that growth stocks will likely take back the lead by early 2022. Goldman acknowledged it’s a tough call to make and both styles could look at times like they are breaking out.
“Until the market has conviction about whether recent inflationary pressures are ‘transitory’ it seems likely that the Growth vs. Value trade will remain volatile,” Goldman’s Ben Snider said in a note Wednesday.
As concerns about higher inflation and interest rates continue, the firm said, “it will be difficult to justify” switching portfolios back to longer-term growth stocks.
So Goldman says growth-at-a-reasonable-price stocks are perfect to meet the moment. The firm screened for S&P 500 names that rank in the top 20% of their respective sectors based on growth, but don’t appear in the top 20% or bottom 20% of their sectors based on value. In other words, such “GARP” stocks have big growth and reasonable (not extreme) prices.
The average stock in this group has a similar valuation to the median S&P 500 stock but are projected to have higher 2022 sales and earnings-per-share growth, as well as a superior long-term growth rate.