By Nick Olivari
NEW YORK, Nov 27 (Reuters) - Sentiment is swinging back to growth stocks, shares of companies that show consistent or accelerating earnings, after they became a dirty word with investors who lost trillions of dollars in the bear market.
After market indexes peaked in March 2000, investors abandoned growth stocks in droves and favored value stocks, which are inexpensive relative to their earnings potential.
"The shift from growth to value was the sharpest and biggest in recent years," said Jeffrey Lindsey, head of large- and mid-cap growth investing at State Street Research & Management Co. which oversees $46 billion.
"The argument for growth is that those stocks will benefit from the swap of money that follows performance."
From July 2000 through to January 2001 as the tech bubble deflated, the Standard & Poor's Barra Growth index dropped almost 20 percent while the Standard & Poor's Barra Value index gained 11 percent.
Though the bear market mauled all stocks, value still outperformed growth with the value index of 336 companies losing 32 percent since July 2000, compared with a 45 percent drop in the growth index, which comprises 164 companies.
Now, though, trading in recent months shows that growth stocks are slightly outperforming value, with an 8.5 percent gain in the Barra growth index since July, compared with an 8 percent gain in its value cousin.
NOT JUST TECH
To be sure, investors don't necessarily want to buy the growth stocks that led the last bull market -- at least not yet, said Patrizio Merciai, Geneva-based global strategist at Lombard Odier Darier Hentsch Group, which oversees $80 billion.
During the tech bubble of the latter half of the 1990's, investors came to view growth stocks as technology and little else. But true growth stocks are those that are not dependent on the economic cycle for expansion and profit growth.
For example, if a manufacturing company like General Motor Corp. expands, it's more likely to reflect the health of the overall economy. But if a company selling satellite-linked navigation devices expands, its probably because more people are buying them as part of their auto package, and that makes it a growth stock, said Tom McManus, chief U.S. strategist at Banc of America Securities.
While companies like Nextel Communications Inc. , up 63 percent, and Yahoo! Inc. , up 60 percent, have led the growth index higher in recent months, investors should be looking for growth beyond those sectors, Merciai said.
Industries such as health care and consumer staples, seen as defensive investments in a down market, became bigger components of the growth sector than technology-related issues as investors became risk averse, he noted.
And without a significant change in sentiment regarding the outlook for telecommunications and computer-related companies, defensive growth stocks are likely to outperform tech-related companies despite recent rallies.
In the last three months, the top 15 growth stocks include companies like Sealed Air Corp. , maker of bubble wrap, up 42 percent, retailer The Gap , up 25 percent, office products supplier Staples Inc. up 31 percent, and food company Sara Lee Corp. , up 25 percent.
But the best news may be that growth stocks have less downside than value stocks, an indication for the long-term investor that it's always a good time to buy growth.
"Overpaying for growth is not as bad as overpaying for value, where (in the latter case) you are throwing money away," McManus said. "Overpaying for growth, you eventually get the growth."