With the outperformance of the MAG7, much discussion surrounds whether they can continue their stellar run. A new year brings new optimism.

It may be a good time to remember a saying from the legendary commodities investor Jim Rogers who said, “every growth stock becomes a value stock eventually”. What Jim means is that no single stock can grow at a rapid rate forever although many investors price some stocks as if they can. While the long-term average company price earnings ratio is 15, Tesla trades somewhere between 100-200. No stock has ever maintained a long-term P/E ratio above 100. 

In market cycle terms, growth stocks often outperform value stocks when the economy is strong or after a large market decline where there are increasing hopes for a brighter future which has been the case since the post GFC March 2009 lows.

These growth stocks, in this cycle, the MAG7 dominate all the headlines and are the centre for irrational exuberance.

So, should you choose growthy Nvidea or value like an energy ETF or individual energy company?

Let’s see how we determine the difference. Growth stocks generally have a higher P/E ratio based on the belief the company will continue to grow revenue or earnings at a higher rate for the foreseeable future. The stock price is usually highly valued but can be volatile based on what the company reports to the investors. This is why some growth stocks can boom then bust. In Australia, look at A2 milk which went from a high of $20 in 2020 to a current price around $5.50. Or more recently lithium stocks.

Often individual sectors can boom for a while but then turn to bust as the capital cycle and normal market dynamics like competition kicks in. Previously high positive forecasts suddenly hit roadblocks and reality. 

Many commentators talk about growth rather than value. That’s because growth stocks can be exciting, and you can spend endless hours arguing why the stock can go higher based on the recent past. Growth stocks make great headlines.

But at some point Jim Rogers’ statement comes to fruition.   

Compare that to energy stocks, long considered valued stocks since the potential growth rate is low. Oil is oil and gas is gas. Yawn. Oil and gas are nowhere as sexy and exciting as AI or robotics.

Compare the fundamental ratios, the dividend yields and the steady returns of oil and gas over the longer term and if your holding period is long term, then maybe those boring stocks beat the growth stocks over the long term.

Can Nvidea, Tesla and the rest of the MAG7 continue to grow and keep pace with investor expectations? I remain sceptical. Will oil deliver solid returns over the next decade? Here, I am more confident thanks to the value in those stocks and the sector more generally.

Buffett likes to say that he and Charlie look for the one-foot hurdles not the seven footers.

At TMM, we agree.