As a new investor, you've most likely come across articles comparing growth and value investing, as well as firms labelled as growth or value stocks. Let's look at how using this lens to evaluate your investing opportunities can help you establish a good portfolio.
What is Growth Investing
Growth stocks are up-and-coming companies that analysts believe will beat the markets for a set length of time. They can be found in small, mid, and large-cap sectors.
Growth stocks aim to enhance their industry status and size in as little time as feasible, whether they're bringing an innovative product or a disruptive business model to the forefront. To accomplish so, they concentrate their first efforts on increasing revenue growth, even if it means compromising profitability for a few years.
When a growth stock's revenue climbs quickly enough, its reputation usually rises with it. This creates a positive feedback loop, attracting more investors and resulting in higher stock prices, price-to-earnings ratios, and price-to-book ratios.
When a growth stock's revenue climbs quickly enough, its reputation usually rises with it. This creates a positive feedback loop, attracting more investors and resulting in higher stock prices, price-to-earnings ratios, and price-to-book ratios.
A growing company will wish to maintain its industry influence and competitive advantage for as long as possible, and any profits will be reinvested in expanding its market share and competitive advantage.
While this strategy prevents many growth firms from paying cash dividends, some do, such as Equitrans Midstream (NASDAQ: ETRN) and Anthem (NYSE: ANTH) (NASDAQ: ANTM).
Growth investment, on the other hand, generally entails purchasing shares with the intention of selling them at a later date for a higher price than when you first purchased them. You buy them, ride the wave, and sell when you're confident you'll return your initial investment and more.
A growth company, on the other hand, would frequently fail to beat, if not even meet, market and analyst growth expectations. When this happens, the price of the growth stock may plummet drastically. You can either establish a long position and wait for the company to recover, or you can sell your shares at a loss during periods of high volatility.
What is Value Investing?
Value investing focuses on larger, more established publicly traded companies with lower valuations than their industry rivals when earnings, long-term growth, and future profit potential are considered.Value companies, unlike growth stocks, do not have massively exponential growth trajectories. Value stocks, on the other hand, move in regulated upward arcs, follow predictable business strategies, and are devoted to generating net revenue and profits over time.
Negative public perception is a common reason for value stocks to trade below their underlying market value. This type of investor emotion can arise for a variety of causes, such as the recent revelation of certain unethical transactions conducted by the company in the past, or the involvement of a major company figure in a personal controversy.
Due to these circumstances, the company's stock may trade at a discount to its price-to-earnings and price-to-book ratios for a period of time. Investors can then take advantage of the company's current downturn by purchasing shares and keeping them until the company's image is restored and its valuation returns to its previous level.
If you acquire the company's shares at a discount and retain them until the price climbs to a level at which you'd happily sell, value investing can appear to be growth investment.
Dividends, on the other hand, are a major feature that distinguishes most value companies from growth stocks. Value stocks don't rely on high expectations for future growth; instead, they entice investors by paying out cash dividends on a consistent basis.
The risk of value investing is that some of the lower-trading companies may never reach their previous worth. Poor management and operations, inability to keep up with the competition, or ineffectiveness in dealing with negative press are the most common causes.
Consider whether you're buying a company for its dividend yields or to see it return to its former glory when it's trading below its true worth.
Growth Investing VS Value Investing
Growth investing can be a profitable exercise if you're not looking for a quick return on your investment, have a knack for selecting winners in emerging markets, and don't mind large stock price swings.
You'll love riding out the storms with your growth stock as it soars to new heights, and you'll be able to profit handsomely if you wait out any lean years before selling.
If you desire consistent dividend yields in your portfolio, only keep a stock for a few months at most, or can't handle too much volatility, value investing may be a better fit for you.
Berkshire Hathaway (NASDAQ: BRK/B) and Procter & Gamble (NYSE: PHG) are two well-known examples of value equities that have endured the test of time (NASDAQ: PG)
You gain immediately from the stable stock price and regular dividend payouts, and you have the opportunity to sell when the company's valuation returns to normalcy.
Still, the greatest way to discover your own distinct investment personality is to experiment with as many different market techniques as possible. You can watch revenue growth and valuation fluctuations with indices like the S&P 500 Growth Index and the S&P 500 Value Index, so you can simply try out both value and growth stocks.
