Growth vs. value stocks

In this article, we explain the key differences between growth and value stocks and discuss their performance and different outlooks.

What are growth stocks?

Growth stocks are stocks that are expected to grow at a rate above the average market rate. Aside from this, growth stocks typically have several other common characteristics:

• High price/earnings (P/E) ratio: The P/E ratio measures a company’s stock price relative to its earnings per share (EPS). Growth stocks can have a high P/E ratio, meaning they trade at high prices while having little or no revenue. However, earnings are expected to grow in the future.
• No dividends: Growth stocks typically do not pay dividends as earnings are reinvested into the company to accelerate growth.
• Higher volatility: Growth stocks can be more volatile than the broader market.
• Riskier: There is potential for high returns, however, business models may be unproven, and there can be a high level of uncertainty surrounding growth companies. As they typically have higher-than-average prices, they can also experience large price drops if expectations aren’t met.

Growth companies tend to have a competitive advantage over other companies in the same industry, such as patents or technology, unique product lines and loyal consumer bases. As a result, they may have considerable market share in their respective industries. Examples of growth stocks includes the ‘Magnificent Seven’ tech stocks: NVIDIA, Tesla, Amazon, Apple, Microsoft, Meta, and Alphabet.

What are value stocks?

In contrast to growth stocks, value stocks are classified as stocks trading at a price lower than their intrinsic value. In other words, these are stocks that are undervalued compared to what the company’s financials, such as revenue or earnings, may indicate. Some other attributes of value stocks are:

• High dividend yield: Value stocks typically have a history of paying substantial cash dividends to shareholders.
• Low P/E ratio: Given that value stocks are undervalued, they typically have a low P/E ratio.
• Low price-to-book (P/B) ratio: The P/B ratio compares a company’s stock price with its book value, the difference between its liabilities and assets. Value stocks have a low P/B ratio, usually below 1.
• Less risky: Since value stocks tend to be established companies with proven business models withstanding the test of time, they can be less risky and volatile compared to growth stocks.

Investing legend Warren Buffett is one of the most well-known proponents of a value investing strategy. Since value stocks are perceived to be cheap or discounted compared to their true worth, value investors like Buffett anticipate that the stock’s price will rise to reflect its intrinsic value in the long term. However, it is, of course, never guaranteed that prices will appreciate.

Value stocks are typically mature companies with modest gains in earnings over time. Examples are Bank of America, Johnson & Johnson and Walmart.

Growth or value?

Choosing a growth or value investment strategy both offer benefits and drawbacks. It is important to make investment decisions based on your investment plan, considering factors such as risk tolerance and investment horizon. Including a mix of growth and value stocks in your portfolio can help with diversification and spreading the risk.

Here are a few key points to consider:

1. Evaluate your investment goals: Determine whether you are seeking capital appreciation or prefer a more stable income stream.
2. Analyse financial metrics: Look at fundamental indicators, such as earnings growth, price-to-earnings ratio, price-to-book ratio and dividend yield to assess the potential of each stock.
3. Diversify your portfolio: Consider including a mix of both growth and value stocks to balance risk and potential returns.
4. Keep an eye on market trends: Monitor market conditions and economic factors that can influence the performance of growth or value stocks.

Examples of value and growth stocks

Growth stocks

Amazon: Its innovative business model, continuous expansion into new markets and relentless focus on customer satisfaction have helped make Amazon a solid growth stock. The company continuously invests in research and development to drive innovation across various sectors. From voice-controlled devices like Echo to drone delivery initiatives, Amazon consistently pushes boundaries and explores new markets. Amazon's P/E ratio tends to be higher than most companies in the retail sector. This is because investors are optimistic about the company's future growth potential. The company currently doesn’t pay dividends.

NVIDIA: NVIDIA is a leader in the semiconductor company, specialising in graphics processing units (GPUs) and artificial intelligence (AI). The company’s GPUs play a crucial role in powering AI applications, and it has benefitted from AI hype. It has also successfully diversified its business into other areas, such as data centres, autonomous vehicles and professional visualisation, and NVIDIA consistently invests in research and development to stay ahead of competition. The company currently pays dividends on a quarterly basis.

Caterpillar Inc.: This company has consistently delivered strong revenue growth over the years. The company's diverse portfolio of products and services, including construction and mining equipment, engines and industrial gas turbines, has allowed it to expand its customer base and penetrate new markets. Caterpillar continuously invests in research and development to develop advanced technologies and products. Lastly, so far the company has consistently demonstrated strong financial performance, with healthy profit margins and return on equity. This financial stability further reinforces its growth stock status.

Value stocks

Pfizer: Pfizer is a multinational pharmaceutical corporation that specialises in the research, development, and manufacturing of prescription medicines, vaccines, and consumer healthcare products. With a long history dating back to 1849, Pfizer is known for its contributions to the healthcare industry, particularly in areas such as oncology, immunology, cardiovascular diseases, and rare diseases. The company has so far consistently increased its dividend payout over time, providing shareholders with regular income. The dividends are currently paid quarterly. Like other established companies, Pfizer has a low P/E ratio.

Coca Cola: The renowned multinational beverage company operates in over 200 countries. Coca Cola has a strong brand presence with a diverse portfolio of popular beverages, including Coca Cola, Diet Coke, Sprite and Fanta. It has demonstrated consistent revenue and earnings growth over the years and with its wide distribution network and marketing strategies, it maintains a competitive advantage in the beverage industry. The company has a history of paying dividends and increasing them annually, making it appealing to income-oriented investors. Dividends are currently paid four times a year.

Procter & Gamble Company (P&G): P&G is a multinational consumer goods corporation that produces a wide range of products including household cleaning supplies, personal care products, and baby care items. P&G is considered a value company because it has a long-standing reputation for delivering reliable and essential products to consumers. The company focuses on providing high-quality goods at competitive prices, emphasising the value it offers to customers. P&G's strong brand portfolio, global presence, and consistent profitability make it an example of a value company that prioritises delivering dependable products to meet consumer needs.