Why 'New' Value Stocks Outperform: The Hidden Driver Of Value Investing

Key Takeaways

• New value stocks generate ~0.33% monthly excess return
• Old value stocks yield about half that return
• New growth stocks largely cause premium disparity
• Half of yearly value/growth stocks are newcomers
• Category migration timing drives stronger value premium

Summary

A January 2026 paper by Linda Chen, Wei Huang and George Jiang finds that roughly half of the stocks classified as value or growth each year are “new” entrants, having switched categories after a two‑year gap. The authors show that the classic value premium is driven primarily by these new value stocks, which delivered about 0.326 % monthly (≈3.9 % annual) excess returns versus 0.147 % monthly (≈1.8 % annual) for old value stocks. The gap of 0.179 % per month is statistically significant and more than doubles the return advantage. New growth stocks, by contrast, account for most of the underperformance that widens the premium.

Pulse Analysis

Value and growth have been the cornerstone of equity factor investing for decades, with the Fama‑French three‑factor model defining value as the lowest‑priced 30 % of stocks based on book‑to‑market ratios. Historically, the value premium—higher returns for low‑price‑to‑book firms—has been attributed to risk premia or behavioral mispricing. Yet the persistence of the premium has varied across market cycles, prompting scholars to dissect its underlying drivers. The January 2026 study by Chen, Huang and Jiang adds a fresh dimension by examining the turnover of stocks between the two buckets.

Analyzing U.S. equities from 1970 through 2024, the researchers discovered that about 50 % of the annual value and growth cohorts are newcomers, having not been classified in the prior two years. These “new” value stocks produced a monthly excess return of 0.326 %, roughly 3.9 % annualized, more than double the 0.147 % (≈1.8 % annual) earned by “old” value stocks. The differential of 0.179 % per month is statistically robust, and the authors trace most of the gap to the underperformance of new growth stocks rather than superior performance of new value stocks. The findings imply that classification migration, not static fundamentals, fuels much of the observed premium.

For practitioners, the results suggest that factor strategies should incorporate the timing of a stock’s entry into the value universe, potentially weighting recent migrants more heavily or using dynamic rebalancing rules. ETFs and smart‑beta funds that rely on a static value screen may be leaving alpha on the table, while also exposing investors to higher turnover costs. However, chasing new entrants can increase volatility, as these firms often exhibit lower liquidity and heightened earnings uncertainty. Ultimately, the study encourages a more nuanced view of the value premium—one that blends traditional valuation metrics with the dynamics of category migration.