You may oftentimes notice some general discussions going around on business channels that are comparing the value Vs growth stocks. The proponents of each styles of investing advocate their method to be the superior one. The legendary investor Benjamin Graham once said that there is nothing like value stock or growth stock. No meaning of Value Vs Growth Stocks. Each has its own merits. The value investing is a safer method as long as the underlying company holds its fundamental essence. The down-side risk of a good value stock is often limited. I always wait for the price to settle on a strong support level (say 200 DMA) and a Fibonacci ratio (Fib ratio) coincides with that level.
What is a Value Stock?
As value investors you usually buy companies in a mature industry known to you. This is because it is easier to predict earnings of such company. Many once well-known blue-chip companies fall in this category. You oftentimes will get attractive stock with low P/E ratio (often hovers below average P/E ratio of similar industry). With low Price-to-Earnings ratio (let’s say 8 P/E ratios) you will actually be paying $8 for earning $1 return. Value stocks have low P/B ratio that oftentimes ranges 1 to 2. But if they go below 1, then you need to research in detail for the reasons behind it.
Value stock uses to generate high dividend yield. This is why I often lean towards value investing. There is of course certain drawback for acquiring the value stocks. You may find them staggering for years without giving you any positive price movement. But you can definitely remain in peace of mind knowing the fact that the downside of these kinds of stocks is minimal. As long as fundamental is remain intact, you need not to worry much.
I am in favor of reducing risk instead of chasing return. Many a times it’s easy to make a reasonable guess-work that a small company XYZ will rake in a sizable amount of profit year after year. But, if your prediction turns out to be wrong, then how can you determine the fair value of that common stock? Your valuation will be out of beat. Technology fame and fades. That’s why I prefer a low or no growth industry with a turnaround sign.
Another lucrative benefit that you can derive from a value stock is that you almost always get decent high dividend from the underlying company. Now, you might be thinking if that is true, then why the stock is trading cheap and not a good stock to invest? The reason behind this is that the underlying companies of value stocks are growing less and management feels that they should not keep all that profits for the business expansion. These companies may not have the growth potential ideas with them. That’s why they don’t want to keep the surplus money or free cash and give it to their shareholders rather than reinvesting into business.
Thus the value companies propose to offer dividend payments to their shareholders. This helps reduce risk to some extent. If ROE (return on equity) of a company is high and the company has growth potential, then why it distribute the extra cash to their investors? Legendary investor Warren Buffet never intends to give dividend to his investor. He feels that instead of giving high dividend, the retained cash should be reinvested into different potential companies and generates more returns. Thus you will see compounding kind of effect here.
What Do Know About Growth Stocks?
Growth stocks, on the other hand, are opposite in character to the value stocks. Here you’ll be raking in higher return for the growth stocks in your holding than the value stocks. Growth stocks are always trading with high P/E and P/B ratios. Investors are ready to give high premium for acquire growth stocks. Sometimes these stocks are trading more than 100 P/E ratios where an investor risks $100 to get a single dollar return. You will often see that the P/B ratio (Price/Book Value) of some growth stocks trade 10, 20, or even 40 ranges.
Growth stocks often produce low dividend yield. They are end up paying low dividend or sometimes no dividend. This is chiefly because growth companies want to retain as much earnings as possible for the future expansion of their business. But, you should buy them at a reasonable price or after a sizable market correction. In technical term around 30/50 DMA or a strong support zone is an ideal situation where you can enter in to them. But you should not overpay for any stock, including growth stocks. Growth stock is the companies that are growing or expected to grow rapidly in future.
Amazon, Netflix, Avenue Super mart, Page Industries are the perfect example of growth stocks. Amazon has a P/E ratio: 102, P/B ratio: 21 and Dividend Yield (D.Y.): 0 whereas Netflix has P/E: 110, P/B: 27 and D.Y.: 0 The Indian companies Avenue Super Mart and Page Industries are having their respective P/E: 101, P/B: 18, D.Y.: 0 and P/E: 85, P/B: 38, D.Y.: 0.45. If you invest in these types of companies, you are investing in growth stocks.
Like value stock, I personally always look for a growth stock to correct sizable to a level where a strong resistance (say 50 DMA) is persisting. If Fib ratio (say 23.6% or 38.2%) is coincide with the strong support levels then that would be an added advantage. I personally follow Elliott Wave Principle (EWP) to find a level to enter into a stock. You’ll be amazed to discover the effectiveness of the Fib ratios coupled with the wave analysis. But many a times, mere technical levels of any stock thus backfired. So, I handpicked fundamentally good stocks and apply wave analysis. And believe me, most of the times I end up with astounding results.
We can say that value investing takes less return for engaging in little risk. Growth stock takes in more risk to generate greater return. That is fine as long as return is handsome. A lot of investors engage in an investing style that gets little reward while taking a big risk! Never ever chase any stock blindly without doing your basic research. Always try to determine its fair value and decide whether you want to invest in a stock based on the risk/reward that it offers. You never know when the fundamental of a growth stock or skyrocketing stock deteriorates and the momentum of that stock ends its journey. So, be prepare, otherwise you’ll be punished heavily beyond your wildest dream.
What are the Advantages of Value Stocks?
$Easy way to generate passive income;
$Able to make you money even though the company doesn’t grow;
$Long Term investment with little maintenance;
$Can make you compounding return with reinvestment option;
And What are True Advantages of a Growth Stock?
$Chance of a faster return on investment;
$Less reliant on long term stability with a little bit of risk involvement;
$Can give you higher return on investment;
Which one is the Better Option?
By analyzing of all parameters, I would go for more on value stocks rather than growth investing. I prefer to rearrange my portfolio of 1:2 or 2:5 kinds. That means if I invest $1000 on growth stock, then $ 2000 on good value stocks or if $2000 on growth stocks, invest $5000 on value stocks. Thus I am able to lower market risks to a greater extent. I always look for turn-around companies, because they have the potential to manifold your return and make you truly rich in the long run. The turn-around companies are often neglected and remained unnoticed for several years. And when they resumed their growth journey, experts start recommending them as the steam is about to end.
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