A Simple Guide to Value vs Growth Investing

By: Scott

The ideas around value stocks vs growth stocks go back many years and there are people that believe strongly on both sides.

You are about to learn...

  • The characteristics of a growth stock
  • Examples of a growth stock and growth fund
  • The characteristics of a value stock
  • Which is right for you: value vs. growth stocks

Investors can utilize a variety of strategies that help them identify stocks with potential returns. Two of the most popular strategies are Value vs. Growth Investing and while the debate rages to which is better, it usually comes down to timing and the appetite of the the investor.

Here, we take a deep dive into both strategies and provide a Simple Guide to Value vs. Growth Investing.

What is a Growth Stock

A growth stock is any stock that Wall Street investors believe will grow faster than the market averages for an intermediate to long term period of time. That faster growth will in turn cause the stock price to appreciate.

A stock growth investing strategy might be one that invests in companies with the following characteristics:

  • A large addressable market. If you want a company to grow you need it to be in an industry that has large, and preferably growing, demand for its goods and services. Online retail would be a good example of a large addressable market. 
  • Visionary leadership, particularly founder led companies. To complement the large addressable market, you want a visionary leader who can capitalize as needed with appropriate goods and services that the market wants. 
  • Winners. You want a company that knows how to win and has won and grown in the past. Sure there are lots of people that make money on turnaround situations, but the best way to build real wealth in the long run is to invest in companies that have demonstrated success in the past (i.e. winners) and hold them for long periods of time while that success continues.

Examples of Best Growth Stocks and Funds

To summarize from above when above there are three characteristics to look for in a top growth stock:

  • Large addressable market
  • Visionary leadership and
  • A track record of winning

When I think of these three characteristics, I think of companies like Amazon, Adobe, Microsoft, Costco and Facebook that you can invest in via the stock market.

Each of these companies are tackling huge and growing opportunities in the areas where they compete.

They have visionary leaders that seem to be able to peer around corners and react to changes in the marketplace in a timely fashion. 

And they have a long track record of winning. This does not assure they will win in the future but would seem to give them a better chance for sure.

Often times these stocks will seem expensive on traditional metrics like price to earnings ratio, or price to book value, etc. And while that may be true at a point in time, an investor in a growth stock is expecting the businesses to grow significantly in the future and make those traditional ratios more reasonable over time.

As an alternative to investing in individual growth companies an investor can put money into a growth fund for stocks to get instant diversification. What is a growth fund you ask?

A growth fund for stocks is a mutual fund (or similar vehicle) who’s primary objective is growth of capital. It does this by investing in companies that the fund manager believes has growth potential above the market averages.

According to a recent article by US News and World Report they ranked the Fidelity Trend Fund (Ticker FTRNX) as the #1 larger growth fund. Their top holdings are Apple, Amazon, Microsoft, Alphabet and Mastercard to give you an example of the types of companies they invest in for their customers.

What are Value Stocks?

A value stock is one who’s traditional metrics around dividend yield, price to earnings ratio, or price to sales ratios are low relative to historical trends for the company and/or the stock market as a whole. 

Investors who believe in value based investing see these low ratios as a temporary event and expect to make money on the asset appreciation when the metrics revert back higher to their historical levels.

Often these value opportunities are created by one time events like a bad quarterly earnings report or an unpopular acquisition that will be forgotten over time if the company continues to perform.

Examples of Best Value Stocks

Here are two examples of value stocks:

Bristol-Myers Squibb Company (BMY) – trading at less than 10 times earnings after taking on a lot of debt to acquire Celgene.

Altria (MO) – trading at less than 10 times earnings and yielding 8%+, most likely due to it being shunned by socially responsible investment funds given that it sells tobacco products 

And there are many value funds as well if you want to do your value based investing through this type of vehicle. US New and World Report ranked Northern Large Cap Core Fund (NOLCX) as there #1 pick for value investor

Value vs. Growth Investing

It really depends on what kind of investor you are and the goals you’ve set in discussions with your financial advisor. 

Both growth investing and value based investing has legions of fans. Significant amounts of money can be made using either method of stock picking.

In Summary   

You can build real wealth over the long term through either growth or value investing. Most importantly you want to buy high quality companies and hold them for long periods of time

Start by investing small amounts of money in and add money over time.

You should be happy with the results.

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