Growth stock mutual funds raced ahead of value funds last year, fulfilling a prediction analysts had been making for years. But in 2008's tough...

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Growth stock mutual funds raced ahead of value funds last year, fulfilling a prediction analysts had been making for years. But in 2008’s tough market, value stocks are back.

Value strategies, which seek underpriced stocks, have historically outperformed growth strategies, which focus on potential future earnings and sales. But analysts say growth is likely beginning a cycle of outperformance, despite the poor year-to-date showing.

In 2007, growth funds returned 12.5 percent, while value funds, weighed down by hefty financial and real-estate holdings, lost 0.14 percent.

Recently, classic growth stocks like Apple (AAPL) and Google (GOOG) declined, along with markets worldwide, on U.S. recession worries, says Morningstar senior analyst Michael Breen. Growth funds, which own pricier shares, had more room to fall than value funds, which tend to hold beaten-down shares, Breen notes.

Merrill Lynch strategist Brian Belski says value stocks have rebounded recently as investors, encouraged by Federal Reserve rate cuts, are buying financial and real-estate stocks that were weakened by the credit crisis. “However, investors are placing too much emphasis on the Fed’s ability to turn around certain parts of the market, in our opinion,” he writes. “We continue to believe that the housing and credit unwind are in their early stages and a recovery is at least several months away.”

Belski says investors should look for companies with profit growth, good cash flow and improving margins and sales. Sectors that fit the bill are electrical equipment, engineering, Internet retail and personal-care products, he says. Household durables and retail banks are vulnerable to broad economic troubles. Earnings expectations for the sectors, though weak, are still too high, he says.