A Study on the Comparison of Performance of Value and Growth Stocks in the U.S. Stock Market

The objective of this paper is to examine the performance of value investment method based on the pretax operating earnings to market value of equity＋net interest－bearing debt (EBIT/EV), book to market value of equity＋net interest－bearing debt (B/EV). The ratios of the EBIT/EV and B/EV were employed in this study to examine the value and growth stock's performance comparing to the performance of S&P 500 as the market index. The value portfolio includes firms whose EBIT/EV, B/EV are among the highest 25 percent for U.S. stocks. The growth portfolio includes firms in the bottom 25 percent. we used all stocks in Portfolio123 which are supplied by Compustat, Standard & Poors, CapitalQ, and Reuters for the period of January 2, 1999 to December 31, 2014. We classified firms that have high ratios of EBIT/EV, B/EV as value stocks. Firms that have low ratios of EBIT/EV and B/EV are defined as growth stocks. The overall results show that the value stocks outperform the growth stocks. These results are not changed with different holding periods. The requirement of ROE (above 5%) has the impact on the performance of growth stocks. The growth portfolios based on EBIT/EV registered higher returns than the value portfolios. However, when we narrowed the sample to the large firms, the value stocks tend to outperform the growth stocks. The implications of the study are: (a) high EBIT/EV and B/EV ratios may be a good indicator of the underpriced security. EBIT/EV and B/EV ratios are a more discerning method, compared to earnings to price (E/P) or book-to-market equity (B/M) ratios. By using EBIT/EV and B/EV, we can utilize other fundamental data about the firm's debt position, tax and enterprise value ; (b) return on equity(ROE) is useful in finding good stocks relative to firm's future earnings streams. As a firm's earning is expected to grow, the performance of the growth stocks also improves. You don't need to avoid such a stock of the firm with high return of equity.