A Stock Market Signal Hiding In Plain Sight? Where Companies Put HQ Matters, Study Suggests

Why Growth Stocks in Expensive Cities Keep Disappointing Investors

Chasing high-growth stocks is not always the surest path to stronger portfolio returns. New research from Penn State and the University of Hawaii found that investors who factor in a company’s headquarters location, and what the local housing market looks like, could build portfolios that significantly outperformed traditional growth-focused approaches in the study’s historical test.

A study published in the Journal of Empirical Finance tracked more than 9,300 publicly traded companies from 2000 to 2019 and found that a portfolio strategy built around headquarters location and local housing conditions substantially outperformed the broader market over a 20-year test period. Growth stocks, shares in fast-expanding companies in sectors like tech or biotech, tend to underperform when headquartered in cities where home prices are rising sharply. Value stocks, tied to more established businesses, were largely unaffected by local housing conditions.

For years, analysts assumed the performance gap between value and growth stocks was mostly about value stocks being stronger. This study points elsewhere. “There’s a puzzle known as the ‘value-growth premium,’ which refers to how value stocks consistently outperform growth stocks,” said co-author Brent W. Ambrose, professor of real estate at Penn State’s Smeal College of Business, in a media release. “In the scientific literature, it appears that value stocks overperform in the market and growth firms are underperforming. We’re proposing a new model explanation that people haven’t really thought about before.”

Hot Housing Markets Are Draining Growth Stock Returns

In cities with high home price appreciation, the performance advantage that value stocks hold over growth stocks ran about 3.6 percentage points per year wider than in areas where prices had been flat. For a long-term investor, that gap compounds into serious money.

It runs through payroll. When home prices climb, workers need higher wages just to afford to live there. Fast-growing companies that are constantly hiring have to meet those demands or lose talent. Growth firms in the study carried labor costs 50% to 65% higher than their value-stock counterparts, and all that extra payroll eats into what shareholders take home. “In regions with more expensive housing markets, growth firms have the worst return,” said co-author Timothy T. Simin, professor of finance at Penn State.

Value firms, which hire far less aggressively, were largely insulated from this dynamic. Because they are not constantly expanding their headcount, rising local wages have less of a bite. Their returns looked essentially the same whether home prices in their headquarters city were surging or flat.

Headquarters Location Matched to 20 Years of Housing and Stock Data

Researchers pulled monthly stock data on companies listed on the New York Stock Exchange, the American Stock Exchange, and Nasdaq. Each company’s headquarters address, drawn from SEC filings, was matched to a local house price index from the Federal Housing Finance Agency, then sorted into low, medium, and high appreciation tiers.

Companies were simultaneously sorted by how their stock price compared to the underlying value of their assets, the ratio that separates growth stocks from value stocks. Growth stocks are companies where investors pay a premium for future potential. Value stocks trade closer to the actual worth of their assets, often in manufacturing, retail, or healthcare.

As local home prices rose, growth stock returns in those areas tended to fall, and the pattern held consistently across recessions, company sizes, industries, and debt levels. Even after removing giant corporations and major tech hubs like Silicon Valley, New York City, and Boston, the result did not change.

Retail, Healthcare, and Manufacturing Feel the Housing Cost Squeeze Most

Not every sector felt the squeeze equally. Retail, healthcare, and machinery manufacturing showed the sharpest performance gaps in high-priced housing markets. Those industries rely heavily on local workers and cannot easily shift their workforce to lower-cost regions, so when housing costs rise, the hit to payroll shows up almost directly in investor returns.

Business equipment and tech companies showed a persistent performance gap between value and growth stocks across all housing markets regardless of local home prices, suggesting other forces are driving their premium.

To put the findings into practice, the researchers built two trading strategies. Buying value stocks in high-appreciation markets while shorting growth stocks in those same markets produced a cumulative return of 442% from 2000 to 2020, compared with 289% for the S&P 500 in the paper’s main comparison. Ambrose noted the findings carry a message beyond Wall Street: “Housing is an expense that firms have to account for: It shows up in their labor costs. If a community is trying to encourage more firms to locate in their community, they can work to make sure housing is affordable.”

For investors, the takeaway is more straightforward than decades of financial research might suggest. Sometimes the most telling thing about a company is not what it makes, but where it sets up shop.

---

Disclaimer: This article is based on peer-reviewed academic research and is intended for informational purposes only. It does not constitute financial or investment advice. Past performance of any strategy described is not a guarantee of future results. Readers should consult a qualified financial professional before making investment decisions.

---