Ask most stock investors to which group they belong and you will get two separate slots: value or growth. We're talking here about two ways of investing; some would even call it styles.
The intent is still the same: make more money in stocks but the way they go about it is quite different. First, understand the terms and how they apply. Growth stocks are those that investors feel will grow earnings real quick. As a result, they are usually priced way up there. Value stocks, on the other hand, are usually seen by investors as not being so exciting and therefore, are priced below growth stocks. Of course, these are not the only ways you can invest, but they are generally considered the primary ones.
Many people think value stocks are less favorably considered stocks, which is not necessarily the case. However, you generally look for those possibilities on a stock list with a 52-week low. So, you are buying at a low point, or as some investors, like to say, "on the cheap."
Conversely, growth stocks usually have a 10 percent + growth over the past five years and pre-tax margins could exceed the past five-year average as well as the industry average.
As far as market is concerned, you could generalize here by saying that growth stocks usually do better during bull markets while their value cousins tend to do better in bear markets. But keep in mind that you can never be absolutely sure who will be on top at any given point. Growth stocks usually have an above-average price-earnings ratio, known as P/E. This is the company's present stock price divided by its earnings per share. For instance, if a stock was trading at $40 a share and earnings for the last fiscal year were $2 a share, then the stock would have a P/E of 20. It's been said that a high P/E usually means that investors are excited about the company's future and will, therefore, pay a hefty price for it.
Value investors are something else. They are usually categorized as bargain hunters, seeking out companies which they believe are undervalued and that have low P/Es. This sometimes gives off signals that investors don't have much faith, but hey, they are affordable stocks and who knows what may happen.
My friends in London tell me that at the moment value stocks are the kings, having outperformed their growth-driven cousins every year since 1998. In fact, the FTSE 350 index of value stocks returned 41.5 percent while the corresponding growth index showed a loss of 17.1 percent. Why? Because in the boom of the late 1900s most growth stocks, particularly those luscious tech ones, became hugely overrated. In a number of instances, their prices rose to about 50 times their earnings. Naturally, when the stock market bubble burst, guess where those stocks landed? Splash!
However, Paul Ilott of Bates Investment Services feels that it's starting to swing back to growth stocks.
In any event, from the financial planning perspective, a truly diversified portfolio would contain both growth and value stocks. We all know what that's called: diversification. Of course, on the value side, just be careful of what you fish out of the water.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access