Why There's Little Value in Value Stocks

From What's Working on Wall Street Now by Louis Navellier

The stock market was insane last week! On Tuesday, the market threw a fit when the Fed cut by only 25 basis points. The Dow plunged nearly 300 points. Many investors are moving away from value stocks toward growth stocks.

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What's Causing the Shift?

The Fed attempted to back-pedal last week with its plan to lend money to banks. Initially, the idea was well received and the market surged 271.75 points, but then fell as much as 111.13 points. That's a 382-point swing in one day. Eventually, the Dow closed higher by 41.13 points.
Personally, I think the market needs a 50-basis point cut. In a recent report to my Quantum Growth subscribers I said: "If the Fed cuts by only 0.25%, the stock market could sell off temporarily." It certainly has. At one point, we were down 120 points that day.

No Value in Value Stocks.

Perhaps the biggest change going on in the market today is the seismic shift from value stocks into growth stocks. Every investors needs to understand this. This is very good news for our Blue Chip Growth Buy List, which is riding the growth wave and is set to beat the market for the eighth time in the past 10 years.

This shift is important recognize because most value indexes lean heavily toward financial stocks--the area that's experienced the most pain lately. Take the recent activity with Washington Mutual (WM), for example. Institutional investors, in particular, have been unloading value stocks over the past several months and moving toward growth stocks. Third-quarter client reviews revealed that most value managers were down, in contrast to most growth managers being up. The shift away from value stocks accelerated.

Take note: You could be walking into major headaches soon if you are invested in a value mutual fund, particularly one of the small-cap value funds that did so well between 2000 and 2006. These funds could be loaded with "imbedded" capital gains. Guess what happens when this asset class flames out and there are heavy redemptions?

Eventually, those imbedded capital gains have to be realized. Ergo, it's very possible that you can lose money in your value fund yet still have to pay taxes. Paying taxes for losing money? Talk about adding insult to injury! This is what happened to some of those high flying growth funds in 2000 that flamed out and were hit with massive redemptions.

One of my proudest accomplishments in Blue Chip Growth is that we steered our Buy List to a profit in 2000 even though so many growth stocks plunged 80% or 90%.

The pain of embedded capital gains is another reason why, when style shifts occur, they can snowball and last for years. By the way, when an asset class grows, the money pouring into that asset class dilutes future capital gains distributions. This means that many of the blazing international funds in recent years have had minimal capital gains distributions due to their impressive asset growth. Capital gains in the mutual fund industry are like one huge game of musical chairs. You don't want to be left standing when the music stops.

Now that growth investing is on the rise again, the fastest-growing growth funds will likely be tax efficient. Financial advisors will naturally steer their clients toward the best-performing and most tax-efficient growth funds.

I advise investors to not get rattled by the market's post-Fed temper tantrums. The strongest growth stocks will emerge from the chaos and lead the market higher. This is exactly what happened to the market 12 years ago as we began another election year.

P.S. For the best large-cap growth stocks, check out my legendary Blue Chip Growth Buy List. Two excellent stocks being featured right now are: Goodrich (GR) and Express Scripts (ESRX). Remember: It's always best to buy when folks are selling.

by Kim Stup |  12/18/07