Value Versus Growth Investing

The two fundamental approaches in stock investment are value investing and growth investing. These two fundamentals determine what an investor would invest in and the profit that would be made from investment. If you are investing for value, your profit would be based on value investment profit, but if you are investing for growth, you would reap the benefits attached to growth investment. It is important to note that these two fundamentals overlap. A growth investor can reap both value and growth and a value investor can reap both growth and value. Before comparing and contrasting the two, we would first be explaining what the two concepts refer to.

What is Value and Growth Investment?

Growth investment is used to refer to stocks with the tendency to outperform their current value and market worth because of their future potential. The value of growth investment is determined by future potential. 

Value investment refers to stocks that are currently trading below their market worth but have the potential to increase in value in the nearest future. While growth stock might not be trading below their worth, value stocks are trading below their market worth. To choose the best category to invest in, we would be examining comparative research between the two types of investments.

Value Stock Versus Growth Stock

The fundamental stock analysis provides a detailed comparison between the growth stock and the value stock. From the analysis, it was revealed that growth stock has the ability to outperform either the overall market worth or some specific aspect of the market worth. However, before the growth stock would rise to outperform the overall market worth, it takes some time. 

On the one hand, growth stock exists in small, mid, and large sectors. They have the ability to retain their future potential until the analyst or investor feels they have achieved enough. This implies that the extent the growth stock would last is determined by the analyst or investor. Before a growth company would be considered to have a chance of making a lot of profits or benefits from growth stock, it must have a good stock or line of stocks that are considered to be of great value to the investors. The companies must also outperform their competitors. With this, the companies would be able to gain an edge over their competitors thereby giving their stock the opportunity to thrive better in the stock market.

On the other hand, value stocks are often operated by a larger and well-established company than the growth stock companies. They are sold below the price the analyst feels they are worth when compared to the benchmark or financial ratio of stocks within their range or level. For instance, when a stock book value is expected to be $25,000 but trading at $20,000, it means that the stock is currently sold as a value stock. The analyst would see this price as a good value play. 

There are different reasons for the undervalued price of stocks. Some of these reasons are highlighted below:

• Public perception of the stock can affect the value of the stock. When, for instance, a leading public figure of a company is caught in a sex scandal, this could negatively affect the performance of the company's stock. Also, if a company is caught in unethical practices like drugs, the stock of such a company might suffer a big fall in the stock market. Should any of these occur, such a company can decide to trade in value stock. But for the value stock seekers to be interested in investing with the company, the company must still maintain a solid financial outlook. The value seekers would believe that society would soon forget about the scandal, and when this happens, the stock bounce back to life. 
• Value stock often trade at a discount involving either the book value, price to earnings, or cash flow ratio

• Another thing that could result in a company trading its stock for value price is the company's decision. This decision is often taken by new companies that are yet to be popular in the stock market. Engaging in the value market helps to build the popularity of such companies.

Characteristics Of Growth Stock

• Better price than the broader market

In growth stocks, investors would be willing to pay a high price to earn multiple because they are positive that the stock would pay off in the nearest future.

• Steady high earning growth records.

Most growth stock companies are not affected by economic crisis or market volatility. As a result, these companies often have a steady record of high earning growth. With this factor, investors would always be interested in investing in their stocks.

• More volatility than other broader market

While growth companies might not be affected by the economic crisis, it can be affected by negative news. If a growth stock company does not also meet the earning expectations of the Wall Street Journal, it might suffer a big fall.

Characteristics Of Value Stock

Usually, value stock managers often look out for companies suffering from public outlook but whose financial details are still very strong. Nevertheless, irrespective of what the value stock investor is seeking, the major characteristic of value stock include:

• Lower stock price than the broader market

The major reason why investors invest in value stocks is the strong belief that stock would bounce back after a given period of time. In fact, the true value of the stock might hasten the recovery of the stock. It is because value stock companies want to hasten the value of their stock that they involve in value stock. Value stock propels investors to invest more.

• Price of the stock is often below physical companies or competitors 

Usually, companies that trade in value investment do these for some reason related to the current image of the company. As a result, investors don't see this as a good reason for stock not to thrive. Hence, they invest in such a company. A value stock is typically for the potential future value the stock would attract. 

• The reason for the reduced price of a value stock is usually less risky than the broader market. 

Since value stock works more with time, it is advisable for long-term investors. Although there is a tendency for value stock to experience more risk of price fluctuations than a growth stock, with time the investment starts paying off.

Value stock or Growth stock, which is better?

One the one hand, the major reason why investors engage in growth stock is because of the tendency of the stock to outperform current market overalls. The reason for this is because of the stock's future potential. On the other, the reason for the belief that value stock would pay off after a long period of time is because what is responsible for the undervalued price is not a solid market reason. Hence investors believe that the value of the stock would change after a long period of time. The question this then brings to mind is, among these two stock fundamentals, which is better? To answer this question, we would be considering the comparative historical performance of these two types of investment and study their individual result. The result that would be gotten from the comparative historical performance would be analyzed using these three factors:

• Time horizon
• Amount of volatility
• The level of risk endured

From the analysis so far, value stock would be seen as the one with a lower level of risk. One of the reasons for this is because companies that engage in value stock are usually very established. Hence, even if the value stock did not get to the extent predicted by analysts or investors, it tends to still attract a significant capital growth value. 

Meanwhile, growth stock does not pay dividends. Instead of this, the money that should be paid as dividends would be reinvested on behalf of the investor. The company does this basically to expand their horizon. If the company is unable to keep up with the analyst or investor growth expectation, there is a tendency for such a company to lose investors. 

For example, a company with highly touted new products may witness a significant increase in the capital growth value of stock especially if the product is a dud or has some flaws affecting its functionality. Therefore, growth stock can be said to have a greater risk of potential than a value stock. 

Historical Performance Of Growth Stock And Value Stock.

In the above explanation, while the first paragraph suggests that value stock would perform better than growth stock, the second paragraph reverts this. The best way to go about this is to consider some historical data. 

John Dowdee, a research analyst, published a report comparing the two investment types on the Seeking Alpha Website. In the report, John Dowdee broke stock down into six categories. Each category revealed the risk and returns on both growth and value investment in the small, mid, and large-cap sectors respectively. 

The result of the study shows that from July 2000 to 2013, value stock outperformed growth stock on a risk-adjustment basis for all the three levels of capitalization. Although the value stocks were more volatile than the growth stock, the result of value stock still outperforms the growth stock. 

However, when the years involved were shortened from thirteen years (2000-2013) to six years (2007-2013) growth stock outperformed value stock. This led the author to conclude that the study does not provide a concrete reply on which of the two types of stock is better than the other. He stated that the winner of each scenario is determined by the duration or length of the study. 

In a different study conducted by Craig Israelsen and published in the Financial Planning magazine in 2015. The result revealed that from the period of 1990 to 2015, the performance of growth and value stocks in all three capsizes. The result also revealed that large-cap value stocks provided an average annual return that exceeded that of large-cap growth stocks by about three-quarters of a percent. The difference was even larger for mid- and small-cap stocks, based on the performance of their respective benchmark indices, with the value sectors again coming out the winners.

The study also revealed that every five years during the period of study large-cap growth and value share almost equal split in terms of superior returns. Small-cap value beat its growth counterpart about three-quarters of the time over those periods, but when growth prevailed, the difference between the two was often much larger than when value won. However, small-cap value beat growth almost 90% of the time over rolling 10-year periods, and mid-cap value also beat its growth counterpart.

Although this record is more detailed than the first record in that it involves a longer period of time than John Dowdee's record, the result is almost the same. Recently, it was observed that over the past decade value stock has not performed as well as a growth stock.

What Investors Look Out For Before Investing In Either Value Or Growth

Investors Investing In Value

What investors look out for before investing in values are bargains. This implies that they are always on the search for companies that are trading below the stock value. When investors consider the stock as underprice, it is an opportunity to buy, if it is overpriced, it is an opportunity to sell. Once a value investor purchases stocks, he or she seeks to ride the price upward as the security returns to its "fair market" price - selling it when the price objective is reached. 

Also, before a value investors would invest, he or she would have done a detailed analysis on:

• Stocks that are undervalued
• Financial statement of the company
• Company's balance sheet
• Liability, cash flow, revenue, and expenses
• Financial ratio

Among the above-listed conditions for investigations, what the investor concentrates more on is the financial ratio. To get this, the investor would first calculate the company's book value. Here, the investor would subtract the company's liability from its asset. The book value would then be divided by the number of outstanding shares. The result would be the book-value-per-share – a ratio that would then be compared with the book-value-per-share of other companies in the same industry or to the overall market.

What Investors Look Out For When Investing For Growth

Basically, growth investors use today's information to determine tomorrow's best stock. They look for the winner among the different growth stock company and consider the company whose stock is expected to experience significant growth in the future. They also search for companies in the position to generate revenue than market expectations. When growth investors find companies that meet these standards, they invest with the hope that the future potential of the stock would be as expected.

Therefore the major difference between the condition used by investors to invest in growth or value is that value stocks' potential is determined by analysis while growth is by 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.

Summary

The decision to either invest in growth or in value is left for the investor to make. However, before investing in either of these, the investor should consider the stock risk tolerance, time horizon, and investment goal. But from the analysis so far, it can be concluded that value stock tends to outperform growth during the economic recession and bear market while growth stocks outperform value stock during economic expansion or bull market.