Standard and Poors creates style indices. For the S&P 500,

–the third of its constituents that have the lowest price/book, price/sales and PE ratios make up its Value subindex

–the third with the fastest growth in sales and profits and the largest recent price rises make up the Growth index.

I can understand why S&P does this: it’s simple, easy to measure and, other than in the creation of the criteria,has no human judgement involved.

For me, the main problem is that neither set of criteria capture the fundamental character of either growth or value stocks. How so?

What attracts a growth stock investor to a name is the belief that the consensus underestimates how strong earnings growth will be and/or how long it will continue. In other words, publicly available data convey a misleading impression of the stock’s potential.

For a value investor, on the other hand, the attraction is two-fold: the worst that can happen has already been discounted (or over-discounted) in the stock’s current price and the possibility that things could get better.

In the real world, as opposed to the world of the index makers, there can be times when there are no good growth stocks and time when there are no good value stocks. There are also times, like the past year or so, where there has been a massive rotation out of growth stocks, in the S&P sense, based on valuation.

I’ve begun to think that the best place to look for value stocks is among the pandemic’s fallen angels. Peleton is a good example.