Don't Give Up Hope, Value Investors

Don't Give Up Hope, Value Investors

By John Dorfman

July 18, 2025

Value investing has trailed growth for three years in a rowand the gap is widening.

In the 12 months through June, growth stocks returned 19.9%, while value stocks delivered just 9.6%. The prior years were similarly lopsided: In 2023, growth returned 30.0% vs. 22.2% for value. In 2024, the gap was even larger36.1% to 12.3%.

These are total returns including dividends, based on Standard & Poor's data.

If you're a committed value investor, as I am, it may be tempting to despair. But the long-term case for value is far from brokenand in today's market, some stocks still offer the rare combination of value and growth.

Why Not Both?

Value stocks are typically out-of-favor companies trading at low multiples of earnings, book value, or cash flow. Growth stocks, by contrast, trade at higher valuations due to their rapid earnings expansion.

Over time, both strategies can work. But when the valuation gap gets too extreme, history suggests mean reversion often follows.

According to Morningstar's Larry Swedroe, the Russell 1000 Growth Index recently traded at 42 times earnings, while the Russell 2000 Value Index fetched just 14. A few years ago, those figures were 32 and 15, respectively. The gap is now a chasm.

That's part of the reason I believe value will eventually rebound. But in the meantime, I've focused my attention on a few rare stocks that combine the best of both worlds: solid earnings growth and modest valuations.

Below are five companies with:

• Price-to-earnings ratios of 15 or less, and
• Five-year earnings growth rates of 15% or better.

1. PulteGroup Inc.

PulteGroup is one of the nation's largest homebuilders, offering a variety of homes at multiple price points. Its average selling price of around $560,000 is roughly 10% above the national median, reflecting a focus on higher-value markets.

While I also like D.R. Horton (DHI), I highlight Pulte here due to its stronger earnings momentum: Five-year earnings growth has averaged nearly 32% annually.

Like others in the industry, Pulte's future depends in part on interest rates. A decline in mortgage ratespossible in 2026could act as a strong tailwind.

• P/E ratio: ~6
• 5-year EPS CAGR: ~32%

2. Diamondback Energy Inc.

Oil prices are no longer at peak levels, but that doesn't mean energy stocks are spent. I continue to favor names like Diamondback, a Texas-based driller focused on the Permian Basin.

Despite commodity volatility, Diamondback has compounded earnings at 35% annually over the past five years. Yet it still trades at just 9 times earningsa modest valuation for a company with substantial free cash flow and efficient operations.

• P/E ratio: ~9
• 5-year EPS CAGR: ~35%

Disclosure: I own Diamondback Energy personally and for most of my clients.

3. Crocs Inc.

You may know Crocs from their distinctive foam clogsbeloved by kids and controversial among fashion critics. But behind the quirky brand is a fast-growing business.

Crocs has grown revenue at roughly 20% annually for the past decade. Excluding nonrecurring items, the stock trades at just 8 times earningsa steep discount for such a strong track record.

• P/E ratio (adj.): ~8
• 10-year revenue CAGR: ~20%

4. Eaco Corp. (EACO)

Eaco is a small-cap distributor of electronic connectors and fasteners, based in Anaheim, California. Distributors often command low valuations due to slim marginsbut Eaco bucks that trend.

Its profit margin sits around 7%, and earnings have grown at a 23% clip over the past five years. The company trades at approximately 10 times earnings.

• P/E ratio: ~10
• 5-year EPS CAGR: ~23%

5. Catalyst Pharmaceuticals Inc.

Catalyst is a rare-disease biotech company based in Coral Gables, Florida. It has three drugs on the market targeting neurological and neuromuscular conditions, and it generated over $500 million in sales over the past four quarters.

While analyst unanimity usually makes me nervous, all eight who follow the stock currently rate it a buyand in this case, I happen to agree.

• P/E ratio: ~13
• Strong product revenue and pipeline potential

This one is a bit more speculative, but the fundamentals justify attention.

Track Record of This Strategy

This is my 19th column on growth at value prices. Across the first 18 editions, the average one-year return was 17.2%, compared to 12.2% for the S&P 500 over the same periods.

Of those 18 picks:

• 13 showed gains
• 12 outperformed the index

The most recent set, published two years ago, underperformedfalling 2% versus a 22% gain for the S&P 500. A 55% loss in Albemarle Corp. (ALB) was the main culprit, partially offset by a 43% gain in Stifel Financial (SF).

Final Thoughts

It's been a challenging stretch for value investors. But when valuation gaps widen and quality companies trade at low multiples despite strong growth, opportunity knocks.

The companies above may not be market favorites today, but they combine durability, earnings momentum, and reasonable pricesa rare and compelling combination.

Disclosure: The author personally owns shares of Diamondback Energy and holds it for most client accounts. D.R. Horton is owned for one client, and the author's spouse manages PulteGroup in a client portfolio.

About the author:

John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or its clients may own or trade the stocks mentioned. He can be reached at jdorfman@dorfmanvalue.com.