Redefining Growth: Using Analyst Forecasts to Transcend the Value–Growth Dichotomy (Part 2)

Abstract

Asset pricing literature typically labels stocks with high price multiples as growth and stocks with low price multiples as value. This definition is accompanied by the view that, over the long term, value outperforms growth and encourages investors to make a binary choice between the two styles. In this second article on redefining growth, we demonstrate that portfolios constructed using an analyst forecast–based definition of growth consistently outperform and that this outperformance is not attributable to the established style factors. Consequently, we demonstrate that 1) the explanation of the cross section of stock returns is aided by the addition of a growth variable and 2) systematic multifactor strategies that combine value and growth factors outperform those that exclude growth.