If you look at your portfolio, you notice both growth and value stock investments. What’s the difference?
Growth stocks are just that-stocks that are believed to have meaningful potential still to be realized. This could be due to a new technology or product, or perhaps a large, untapped market in which to sell their product(s) or service(s). These stocks will often trade at higher Price/Earnings multiples, and in some cases may not be profitable yet because they are reinvesting their income back into the business to continue growing. A growth investor is banking on the company’s ability to generate outsized benefits in the future.
Conversely, value stocks are stocks that are believed to be trading below their intrinsic, or fair, value. These are often more mature companies that have size and scale with respect to their business. They typically have lower price/earnings multiples and are more likely to pay dividends. Value investors are buying good companies and banking on the company’s shares returning to fair value in an effort to earn outsized returns.
The chart below shows that over the past 30 years Growth has outperformed 16 years. Notice Growth outperforms through much of the 1990’s before Value takes the lead from 2000 until 2007. Both have advantages based on where we are in the business and economic cycles. But timing such cycles is very challenging and influenced by many factors. We believe a balanced approach is the best way to proceed over time.
Source: Factset Research Systems (data as of 8/6/2019)