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Investors paying too much for future growth may be hurting returns: Morgan Stanley
🇴🇲 Oman /Economy & Trade

Investors paying too much for future growth may be hurting returns: Morgan Stanley

From Times of Oman · () English

Summarized and contextualized by DistantNews.

At a glance

Analysis Documents & data Context piece
  • Investors may be overpaying for future growth, potentially hurting their returns, according to Morgan Stanley.
  • Stocks with lower growth expectations have historically outperformed those priced for aggressive expansion.
  • The 'present value of growth opportunities' (PVGO) metric suggests that high PVGO stocks yield lower returns than low PVGO stocks.

Investors might be overvaluing companies based on optimistic future growth projections, potentially leading to suboptimal returns, a report by Morgan Stanley's Counterpoint Global Insights suggests. The analysis indicates that stocks with more modest growth expectations have historically delivered stronger performance compared to those priced for rapid expansion.

The second part is the option to make investments in the future that create value. This part is called the 'present value of growth opportunities' (PVGO).

— Morgan Stanley ReportDefining the 'present value of growth opportunities' metric used in the analysis.

The report, "Opportunities and Expectations: The Present Value of Growth Opportunities in Valuation," introduces the concept of the 'present value of growth opportunities' (PVGO). This metric represents the portion of a company's valuation attributed to future investments and their potential to generate additional returns. A high PVGO signifies strong investor confidence in a company's future value creation, while a low PVGO suggests more conservative expectations.

The five-year median TSR was 8.7 per cent for the quintile with the lowest PVGO percentage and 5.0 per cent for the quintile with the highest PVGO percentage.

— Morgan Stanley ReportPresenting findings on the performance difference between stocks with low and high PVGO.

Analyzing U.S. public companies with market capitalizations exceeding $1 billion between 1990 and 2024, Morgan Stanley found a consistent trend: stocks with lower PVGO percentages yielded higher total shareholder returns (TSR). The five-year median TSR was 8.7% for the quintile with the lowest PVGO, compared to 5.0% for the quintile with the highest PVGO. This performance gap remained significant over long periods, with the return spread being positive in approximately 90% of the years studied.

The return spread is positive in about 90 per cent of the years and averages 2.6 percentage points over the full span.

— Morgan Stanley ReportHighlighting the consistency of the performance gap between low and high PVGO stocks over time.

At a broader market level, periods marked by elevated growth expectations have historically preceded weaker long-term returns. The report also noted that the PVGO metric appears to offer more consistent returns than traditional value-investing approaches, such as those based on price-to-book ratios, especially as intangible assets gain prominence. Morgan Stanley observed that while future growth opportunities typically account for about 35% of the S&P 500's valuation, this measure was significantly elevated by the end of 2025, signaling potentially inflated expectations.

The PVGO percentage seems to provide higher, and more consistent, returns. The average five-year return is 230 basis points above those of the value factor.

— Morgan Stanley ReportComparing the effectiveness of the PVGO metric against traditional value-investing approaches.
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Originally published by Times of Oman. Summarized and contextualized by our editorial team with added local perspective. Read our editorial standards.

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