Photo courtesy Anna Nekrashevich.
There are many investment strategies in the stock market and growth and value investing are two distinct strategies. A growth company is expected to grow at a better rate than the average growth of the market. The revenue and earnings are expected to grow at a faster rate as compared to many other companies. The value stocks are considered to be undervalued as compared to their earnings and long-term growth potential. We will discuss in detail the growth and value stocks-
Growth Stocks-
Growth stocks continue to generate strong profit growth over a number of years and belong to the emerging companies which have yet to make a great name i.e. they are newer and less established. These companies trade at a premium and outperform most of the stocks in the market due to better earnings. The high-growth companies do not offer regular dividends as they deploy this capital for the company’s expansion.
Investors tend to invest in these companies due to their future growth potential so the price tends to be higher. These stocks have the potential to deliver multi-bagger returns and as long as the company’s growth is at a fast pace the valuations can keep rising. The growth stocks are mostly in midcap and small-cap companies and have a good chance to grow over the next few years due to the product/products they have which are expected to do well in the market. These companies are generally well managed due to which they have an edge over their competitors. The only risk with these companies is that when investors buy at a such high price and if there are some unforeseen circumstances, then the stock price will fall causing loss to the investors.
The price-to-earnings multiples of the growth stocks are generally high as the investors expect them to continue to do well over the years which can even in weak economic conditions. These stocks are highly volatile due to the fluctuations in their price.
Value Stocks-
Value stocks are stocks that have strong fundamentals and a stable business that delivers moderate sales and earnings growth. These stocks are significantly cheap as compared to the market or the industry in which they operate which may be due to recent bad results or some negative publicity received by the company. When the stock becomes very cheap, value investors buy them in the hope that the price would recover in the future when other investors or market participants find them undervalued. When the financials are good the value investors would purchase the stock hoping that people would forget about the negative publicity and in the end, the stock would move up. Let us say the book value of a company is Rs. 100 but it is trading at Rs. 50 a share; at the moment many investors would consider it to be a good value buy.
Stock market analysts compare the intrinsic value of the company to its present price. The intrinsic value can be found out by studying the business model, financial results, competitors, and management. Value stocks trade at a discount to the book value and the price-to-earnings ratios. Unlike the growth stocks these are high dividend yield stocks. These stocks have a lower level of risk and volatility as they are found in large and well-established companies.
Some of the differences between the growth and value stocks are-
There are no rules or guidelines on when to invest in value stocks or growth stocks. It entirely depends on the investors’ risk profile, time horizon, and investment goals. The growth stocks tend to outperform during the bull market while the value stocks tend to outperform during the bear market or the economic recession. In the end, diversification in a portfolio matters. Both growth and value investing can turn out to be profitable. An investor can invest both in growth and value stocks and diversify their portfolio.