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Growth and Value Stocks
- Charles Lin
- Aug 17, 2022
- 3 min read
Updated: Nov 28, 2022
Introduction
Oh boy, this is gonna be a big one. We’re going to be discussing two terms today. What are growth stocks, and what are value stocks? A growth stock is a stock that is expected to grow very rapidly in the short term. Seems pretty straightforward. Value stocks are a bit trickier. A value stock is one that is undervalued. Valuation is an entire monster in and of itself to slay, so check out my article devoted to it here. The essence, though, is that the stock is cheaper than it should be based on the company’s financial situation and qualitative strengths (this is fundamental analysis, yet another beast to tackle).
Growth Stocks
Let’s go a bit more in-depth into the characteristics of growth stocks. You will find them most commonly in the technology sector, since that has been the fastest growing industry for the past couple of decades. I’ll throw a couple here that you’ve probably heard of: Tesla, Amazon, Google. Probably the most important thing you need to know about growth stocks is that they need money. A lot of it. Growth companies are often doing something new (think Tesla), and they need a lot of money to pour into research. They also want to expand quickly, which requires money. Oftentimes, they will have a lot of debt, since they take out a lot of loans to raise money (hopefully some alarm bells are ringing here). Note that growth stocks will often not pay dividends, since they need all the money they can get. Dividends are expensive, and they can’t spare extra money to give back to their investors.
Value Stocks
Now it’s time for the value stocks. These can really be found in any industry. A couple examples that you may know, at least at the time of this writing, include Verizon, Home Depot, and General Motors. Historically, many value stocks will have had steady growth. It doesn’t have to be rapid growth; that’s for growth stocks. The marker that the vast majority of investors use to identify value stocks is a low P/E ratio. The P/E ratio is a very important measurement of valuation. Check out my article on it here. Remember that a low P/E ratio often means that a stock is undervalued, so it makes sense that this would be a characteristic of a value stock. Value stocks also typically have strong long-term prospects. Maybe they have very strong brand recognition, so they’re unlikely to go out of business soon (think Coca-Cola). They could be well-established within their industry, making sure they keep making money. A final characteristic of a value stock is a high dividend yield. Unlike growth companies, value companies can afford to pay dividends since they are focused on slow and steady growth instead of rapid expansion.
Comparison
So when all’s said and done, which one is better? As is always the case, there’s no definitive answer. Actually, both have their benefits and drawbacks, so investing in both is the best strategy. Growth stocks obviously have very powerful short-term growth, which is very cool. You can get a lot of money relatively quickly through them. However, they are also risky, since they typically have a lot of debt (remember the alarm bells?). If it turns out that the company isn’t able to get enough money to pay back all that debt, they will go out of business. Value stocks may not have those short-term gains that everyone loves, but they are a lot safer, pay great dividends, and will return a lot over the long-term. In fact, for long-term investing, value stocks have been shown to outperform growth stocks. However, as I said before, both are great. Personally, I prefer growth investing because I find it way more exciting. Most growth companies are on the cutting edge of technology, which makes them very interesting to research. I’m also a sucker for those quick gains. The choice is completely yours though. You get to decide if you want to focus more on growth or value. Good luck!
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