Throughout the cycles of the markets, there have been two main components when it comes to how to look at and compare companies invest-ability. Some investors have short term or long-term outlooks while others have conservative or aggressive approaches. But the main components, growth investing and value investing, are two different investing styles. Usually, growth companies exhibit above-average revenue and earnings growth potential and value companies present an opportunity to buy shares below their actual value. But mainly it all stems from what the Growth vs Value companies can generate which reveals their true worth and potential.
Growth companies can be found in many sectors and can only retain this status until analysts feel that they have achieved their potential. They are considered to have a good chance for considerable expansion over the next few years and the potential to outperform the overall market over time because of their future potential. The concept of a growth company versus one that is considered to be undervalued generally comes from the fundamental company analysis. Growth companies tend to have relatively high valuations as measured by price-to-earnings or price-to-book value ratios. However, they also see faster growth in revenue and income than their peers.
Value companies are classified as currently trading below what they are really worth and will thus provide a superior return and have relatively cheap valuations relative to their earnings and long-term growth potential. Value companies don’t have flashy growth characteristics. Companies considered value companies tend to have steady, predictable business models that generate modest gains in revenue and earnings over time. Sometimes, you can find value with companies that are in decline. Still, the company’s price is so low that it understates the value of their future profit potential.
In all truth, growth or value investing strategies are better evaluated in the context of an individual investor’s outlook.
• Overall growth – Most growth companies avoid paying dividends to their shareholders. That’s because they prefer to use all available cash by reinvesting it directly into their business to generate faster growth.
• Volatility – The price of growth companies tends to be extremely sensitive to changes in the future for a company’s business. When things go better than expected, growth companies can soar in price. When they disappoint, higher-priced growth companies can fall just as quickly.
• No immediate financial need – Growth companies can take a long time to realize their full potential, and they often suffer setbacks along the way. It’s critical that you have a long enough time horizon to give the company a chance to grow.
• Income – Many value stocks pay out substantial amounts of cash as dividends to their shareholders. Because those businesses lack significant growth opportunities, they have to make their companies attractive in other ways. Paying out attractive dividend yields is one way to get investors to look at companies.
• More stability – Most value companies don’t tend to see very large movements in either direction. As long as their business conditions remain within predictable ranges, the companies price volatility is usually low.
• Long Term – Value companies don’t turn things around overnight. If a company is successful in getting its business moving in the right direction, however, the company’s price can rise quickly. The best value investors identify and buy shares of those companies before other investors catch on.
Overall, when it comes to performance, there is no clear-cut winner between growth and value companies. When economic conditions are good, growth companies on average modestly outperform value companies. During more difficult economic times, value companies tend to hold up better. Therefore, which group outperforms depends a lot on the specific time period that you’re considering.
The decision to invest in growth vs. value companies is ultimately left to an individual investor’s preference, as well as their personal risk tolerance, investment goals, and time horizon. It should be noted that over shorter periods, the performance of either growth or value will also depend in large part upon the point in the cycle that the market happens to be in.
At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of the Growth vs Value within their investments. Having a good approach and focus on the most important factors before investing is key. Let us help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.