Growth vs. Value Investing
There are two fundamental approaches to stock market investing: growth and value. They both have a place in Global Asset Management portfolios. Growth stocks offer investors strong earnings growth. Value stocks trade at prices considered undervalued compared to their sector or the overall market. They reflect different, but complementary, investment styles and in combination add diversity to an investment portfolio.
Growth & Value: Definition
Growth stocks are shares in companies that have reported above-average earnings growth with expected future higher-than-average growth in earnings, profit and share price. They key word is ‘expected’: there are no guarantees and these stocks often involve higher risk and volatility. G.A.M defines growth stocks as having three main characteristics:
- Higher Relative Prices—Trading at higher price/earnings ratios which investors willingly pay expecting to sell at even higher prices reflecting the future growth of a company
- High Earnings Growth Track Record—Compared to earnings in cyclical stocks that tend to decline during slower economic times, growth stocks have the potential to show continued higher earnings growth even during depressed economic conditions
- Higher Beta—More volatile than the overall market. Given the higher relative prices, growth stocks are at greater risk of steep declines in reaction to negative news, especially earnings reports that fall short of analyst expectations
Value stocks by comparison are shares in companies that have good fundamentals but are out of favor in the market. Value stocks can also include shares of fundamentally strong companies that are too small for large investment firms to cover. G.A.M. defines value stocks as having three main characteristics:
- Lower Stock Market Prices—Trading at lower price/earnings ratios than the stock market and usually lower price/book value. The theory of value investing is to buy shares of solid companies that will increase in price when the market recognizes their true value
- Lower Industry Prices—Trading at lower prices than stocks in the same sector or industry. The lower prices often reflect investor overreaction to negative news that may include earnings disappointments, legal issues or other bad news in the media
- Lower Risk and Volatility—There is a tradeoff here. Value stocks are less risky than growth stocks, but they may take time to rise to their true price potential. Therefore, they are better suited to long-term investors who won’t need access to capital in the near future.
Global Asset Management Portfolios
Both growth and value stocks have a place in investment portfolios. They take turns performing well based on where we are in the economic cycle and varying market conditions. People have used statistical analyses to support both growth and value investing. Clients often ask which stocks offer a better chance of generating larger returns for long-term time horizons. The best answer is a mixture of both. During periods where corporate earnings are rising and interest rates are falling, growth stocks perform better. The flip side is they will react more when the economy cools. We mainly find value stocks as mentioned in cyclical industries. These generally increase more in price in the early stages of economic recoveries and to decrease less during periods of rising interest rates. They are less reactive. However, they will lag growth stocks during a strong bull market phase.