Posted by Early Growth
October 25, 2021 | 5-minute read (820 words)
Comparing Value vs. Growth Stocks: Which is Better?
When investing in stocks, there are two main approaches – value investing vs. growth investing. Value investors look for opportunities to buy when stock prices are under the market rate and about to rise. In contrast, growth investors buy at market rates but select stocks that are expected to yield a higher than average return.
Which strategy should you choose? The value vs. growth debate has been ongoing for eons, and there are plenty of experts on either side. But choosing between value vs. growth stocks shouldn’t be a black and white decision.
What are Growth Stocks?
Primarily focused on projected returns rather than the initial buy-in value, growth stocks focus on companies that have the best future potential and those that have already demonstrated above-average performance. Indicators for future performance include expansion plans, new product lines, and any other variables that could lead to a competitive edge.
What makes growth vs. value stocks appealing is that, often, the evidence of a sound investment is readily apparent. Stocks that have already outperformed competitors should continue to do so, and growth investors capitalize on this to maximize returns. In other words, they are chasing exponential growth.
Buying growth vs. value stocks can involve higher initial costs, as growth companies may already be the leaders in their respective fields.
What are Value Stocks?
Value investing means buying stocks that are trading below market value but show promise of a rebound. Value companies are typically characterized by low asset or profit multiples that are not warranted over an extended period.
Timing plays a significant role in value vs. growth strategies, as there are many reasons a company’s stocks can underperform. Short-term reasons include PR crises or political issues. Longer-term reasons include depressed industry conditions or a dip in share value when a product flops unexpectedly. Either way, the general mindset of investors choosing value vs. growth stocks is that most companies will revert to a mean average profit over time.
Value Versus Growth Investing: Which Should You Invest In?
Ultimately, the decision comes down to investor preferences and the benchmarks used for selection. But the end goals of growth vs. value investing are essentially the same. Both aim to buy low and sell high. They just use different methodologies.
When to Invest
Growth stocks are likely to perform better when interest rates are decreasing, and company revenue is increasing. In general, growth vs. value stocks appeals to investors who:
Value stocks tend to do well in times of economic recovery but are not so reliable in a bull market when prices are continually rising. Value vs. growth strategies are good for investors who:
- Have flexible investment horizon times – Growth stocks can take time to mature, so patience is required.
- Are confident in new markets – Picking winners in fast-paced emerging industries is key to success.
- Don’t need an imminent return – Most growth companies reinvest rather than paying out substantial dividends.
- Can deal with market variation – Growth stock prices can be incredibly sensitive to change.
Weighing the Risks
There are risks with both approaches, but the main considerations are as follows.
- Want immediate rewards – Stock prices can rise quickly once a company starts moving in the right direction.
- Can rationalize value – Some stocks simply never meet expectations, regardless of current or futureproofed valuations.
- Want immediate income – Many value companies pay out cash dividends to investors.
- Favor stable prices – Value stock prices are more predictable and less volatile than growth stocks.
- Buying in high and experiencing a price fall rather than an increase.
- Lower than expected growth
The Best of Both Worlds
There’s no need to pick one over the other. In fact, many healthy investment portfolios benefit from a blended approach that adds diversity while also helping to minimize risk. Ultimately, it’s not a case of value stocks vs. growth stocks at all. Besides, some value stocks naturally evolve into growth stocks over time and vice versa. Investors who buy across an array of sectors normally end up with a mix of both.
- There’s no guarantee of a win. Cheap stocks sometimes signify a company is in trouble and at risk of bankruptcy.
- Buying too soon and having to wait longer for a return on investment.
Wherever you sit in the value vs. growth debate, investments need regular monitoring to account for market fluctuations and avoid under or over-investment.
Whether you’re looking for investors, investing opportunities, or need help understanding and managing your firm’s financial health, Early Growth can assist you. Our experienced advisory team delivers forecasting and planning insights that allow you to make better decisions. From managing your capitalization table to 409A valuations, we’ll help you achieve transparency as your company grows and its capital structure evolves.
Contact us today and schedule a call to discuss your company’s unique needs.