At different periods of time, the stock market appears to favor one of two stock types - value stocks or growth stocks. Since the 2008 market downturn, for example, the market has primarily favored growth stocks. But sources are speculating that value stocks could be making a comeback due in part to big changes caused by the pandemic. These speculations, of course, do not guarantee performance.
As you watch what’s happening in the markets, it’s important to know what the difference is between value stocks and growth stocks.
What Is Value Investing?
The idea behind value investing is that investors are, essentially, bargain hunting. They’re looking for stocks that they believe are being undervalued by the market. If they consider a stock to be underpriced, it’s an opportunity to buy. If they consider it overpriced, it’s an opportunity to sell. Once they purchase a stock, value investors seek to ride the price upward as the security returns to its “fair market” price – selling it when this price objective is reached.
To determine a value investment, investors may examine the company’s balance sheet, financial statements and cash flow statements to get a clear picture of its assets, liabilities, revenues and expenses.
Risks of Value Investing
There’s no guarantee that a stock will appreciate in value as much as an investor expects it to. A stock an investor believes to be undervalued may remain undervalued, or even drop in value.
What Is Growth Investing?
Growth investing essentially uses today’s information to identify tomorrow’s strongest stocks. The idea is to look for “winners” - stocks of companies within industries that are expected to experience substantial growth.
Growth investors seek companies in a position to generate revenues or earnings greater than what the market expects. When growth investors find a promising stock, they buy it, even if it has already experienced rapid price appreciation, in the hope that its price will continue to rise as the company grows and attracts more investors.
Where value investors may use analysis, growth investors use criteria. Growth investors are more concerned about whether a company is exhibiting behavior that suggests it will be one of tomorrow’s leaders; they are less focused on the value of the underlying company.
For example, growth investors may favor companies with a sustainable competitive advantage that are expected to experience rapid revenue growth, that are effective at containing cost and that have an experienced management team in place.
Risks of Growth Investing
Growth investments may have an above-average price-to-earnings ratio (PE ratio), but they may in some cases be prone to higher volatility than value investments. These investments are typically bought at an already high price, and there’s always a risk that the price will fall or cease to rise any further.
Value investing and growth investing follow the same general purpose - to buy low and sell high. While they can often overlap in criteria, the key difference between these two guiding principles is this: value investments have generally already proven their worth, while growth investments show potential for future worth. In other words, both investment types are banking on the assumption that the value will rise, but for different reasons.
In regards to your own portfolio, you may find that a mix of value and growth investments could provide a healthy and diverse assortment. If you're curious about making a change to your portfolio or just want to further understand these differences, give us a call here at Evergreen Financial Group.
Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including Young Professionals, Current and Future Retirees and Church Staff Members.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Evergreen Financial Group, LLC is a registered investment advisor offering advisory services in Montana and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. All opinions and estimates constitute Evergreen Financial Group’s judgement as of the date of this communication and are subject to change without notice. Evergreen Financial Group does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall Evergreen Financial Group be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if Evergreen Financial Group or a Evergreen Financial Group authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.