Value-oriented investors look to buy stocks that appear to be bargains relative to the company’s intrinsic worth. Growth investors prefer companies that are growing quickly, and they are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price.
Here are some characteristics of each:
Value Stocks Growth Stocks
Relatively low P/E ratio High P/E ratio
Low price-to-book ratio High price-to-book ratio
Relatively slow earnings growth Rapid earnings growth
High dividend yield Low or no dividend yield
Sluggish sales growth Rapid sales growth
Both value stock investing and growth stock investing have well-known and successful advocates. For example, Warren Buffet, his mentor Benjamin Graham, and John Templeton are solidly in the value camp. Thomas Rowe Price, Jr., is often called “the father of growth investing,” and Philip Fisher is known for his books and articles as a strong proponent of the growth philosophy.
Rather than favoring one investing discipline, I believe these strategies can actually complement one another. Employing an asset allocation approach, I often recommend part of a given portfolio to be in value stocks, with another portion in growth stocks. This balanced approach recognizes that, at times, prevailing market conditions will favor one style of investing – it definitely is not always the same one that fares better than the other.
For example, over the past decade or so, growth stocks have been stronger. From 2007 to 2017, the growth stock index is up 190%. The value index over the same period is up 98%. Both have been profitable, but growth has out-performed value.
However, from 2000 to 2006, the value stock index was up 69%, while the growth stock index was actually down 29%.
Many studies have attempted to determine which style of investing is better, and most have been inconclusive. It seems agreed that much depends on the market conditions during the timeframe of the investment. As a rule of thumb, when the economy is doing well, growth investing is favored. But when the economy slows down, more emphasis turns to value investing based on the underlying fundamental assets of a company.
In summation, then, the growth-versus-value debate is ultimately dependent on the investor’s risk tolerance, investment objective, and time horizon – as well as the current state of the market. I believe there is a strong case to be made for both growth and value investing, and both growth and value stocks can co-exist nicely in a given portfolio.
Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.
All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses.