Growth vs. value stocks: Growth's streak may be over

— -- Q: Why do "growth" stocks continue to outperform "value" stocks this year?

A: Among investors, the growth vs. value debate gets as heated as Pepsi vs. Coke or McDonald's vs. Burger King.

Before I explain the debate and why growth stocks have been doing better than value stocks lately, it might be helpful to provide some quick background.

Essentially, value stocks are the beaten-up and overlooked stocks on Wall Street. There are ways to measure this, namely the price-to-book ratio. But, it's easier to think of value stocks as shares of companies that might be in mature, low-growth areas of the economy or stocks that those buying them believe are just undervalued by other investors.

Growth stocks, by contrast, are stocks of companies that seem to have the world in front of them, with boundless growth opportunities in exciting, often new, industries.

Historically, value stocks have done better than growth stocks. Between 1927 and 2006, large U.S. value stocks rose 11.6% a year on average, topping the 9.4% average annual return of large U.S. growth stocks, according to IFA.com.

Value stocks tend to outperform growth stocks for a simple reason: Optimism. Investors buying growth stocks are betting that the company's growth can keep accelerating, causing earnings to beat expectations. Growth investors tend to get so caught up in the momentum. They don't mind the price they're paying, betting that earnings will make good on the promise. But bad things can happen to good companies, and many of the people who pay up, betting on momentum, get hurt.

Meanwhile, investors who buy value stocks are paying realtively cheap prices, or as they say on Wall Street, low valuations. Certainly, some value companies will stumble and may even go out of business. But not all value companies will, and because investors paid more reasonable prices up front, they stand to benefit when the companies deliver.

With all that said, the value vs. growth theory hasn't help up the past couple of years.