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Value stocks vs Growth Stocks: What's the difference

Value stocks vs Growth Stocks: What's the difference
Published - November 23, 2022 @ 1:00 PM (EET)

Growth and value refer to two categories of stocks built on different investing styles and knowing these differences can help investors respond to periods of market turbulence like the 2020 pandemic and the financial crisis in 2008.    

Although weighing the benefits of these two competing investment styles can be intimidating and are often pitted against each other, portfolios with a balanced blend of both can lead to increased diversification.

WHAT IS VALUE INVESTING?

Value stocks are generally undervalued relative to their fundamentals, often have high dividends, and tend to be more sensitive to the business cycle.  

They are likely to belong to more mature companies with solid-long term and predictable business models but are trading below their actual worth due to short-term market setbacks or because the market underestimates their growth potential.

Although value stocks don't have flashy growth characteristics, it has a tradition of outperforming growth investing over the long run.  Some of the top-value stocks in the market include Intel and General Motors.

Since 1926, value investing has returned 1,344,600% compared with growth investing, having gained just 626,600%, according to the Bank of America.  Another study by Fidelity shows that value stocks have outperformed growth stocks for the 26 years between 1989 and 2015.

GROWTH STOCKS

Growth stocks represent companies that have demonstrated better-than-average gains in earnings in recent years and are expected to continue delivering high levels of profit growth and outperform the overall market over time.

Such companies prioritize going from small, up-and-coming businesses to leaders in their industries as quickly as possible and are often referred to as "aggressive stocks" as they tend to have relatively high risk. Typically, growth stocks fall under the technology sector and include companies like Apple (APPL) and Facebook's Meta (META).

 

While analysts consider growth companies to have a good chance for considerable expansion over the next few years, either because they have a product or line of products expected to sell well, there are no guarantees. 

Due to expectations from investors of high sales or profits in the future, they generally have high price-to-earnings (P/E) and high price-to-sales (P/S) ratios which means they are usually more expensive.

INVESTING IN VALUE, GROWTH, OR BOTH?

In 2022, the MSCI world value Index, which represents large and mid-cap equity performance across all 23 developed markets countries, has fallen around 7% on a total return basis compared with the 25% tumble for the index provider's growth index.

According to Bloomberg data, the strong relative returns mean that an investment strategy whereby traders purchase shares in global companies that are cheap compared to their book value and profits and bet against more expensive groups has generated returns of nearly 30% as of mid-2022.

Essentially, the stock market goes through cycles of varying lengths that favor either growth or value strategies. When investing long-term, some individuals combine growth and value stocks or funds for the potential of high returns with less risk. 

It allows investors to, in theory, gain throughout economic cycles and together add diversity to the equity side of a portfolio.

CONSENSUS

As value stocks tend to outperform during bear markets and economic recessions, investors' focus appears to have recently shifted in favor of value stocks rather than growth stocks that helped drive major indices to new highs.   

Given there are often significant differences in the performance and construction of Growth and Value stocks compared to the factors or characteristics of growth and value, it is recommended that investors take a more factor-based approach as it pays to know what you're buying.

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