What is Value? What is Growth?

Value vs. growth.  An age old question.  Most stocks can be classified as being a value stock or a growth stock.  Both make money but in different situations and in different ways.  Many people think of value investing in terms of Warren Buffet or in a more recent example, Michael Burry.  These guys uncover value in companies that others have overlooked.  They do tireless research to find things that others are too lazy to look for.  Growth stocks are typically associated with IPOs,  new technology, emerging trends, a resurgent thesis.  They are based more on their future capacity to grow into the earnings multiples that investors have placed on them.  They are an agent of change or a new exciting competitor that will do something better than their old tired competitors.

Value is typically overlooked.  Growth is typically promoted.  Heavily.

Good VALUE is based on the price you are paying for the company being cheap relative to what the company IS:

  • What the company can do in the near future.  Can the company earn more money in the next year relative to the 12-months forward earnings to price ratio?  What is the multiple being applied to its peers?
  • How much will the company pay you for owning the stock?  What is the dividend yield?
  • Is the company cheap compared with its assets?  What is the book value per share?

Good GROWTH is based on the price you are paying being cheap relative to the company CAN do:

  • What is the internal growth rate of the company?  Does the price reflect this?  Is it REAL?
  • What is the short term EPS ?
  • What are the long term EPS growth and sales trends?  Are they sustainable or are they based on a trend or  fad (secular trend).

This is the most simple list I could put together on the subject.  There are many books devoted to this subject that anyone could delve into.  Something important to note is that just because a stock is not have “Value Stock” characteristics does not mean that it’s a growth stock and just because something no longer exhibits growth qualities doesn’t mean that it’s automatically a value stock.  These terms are all relative.  They only ever considered absolutes for the purposes of indexing.

I tend to favor good value when I’m looking for ideas.  On the long side there are stocks that are total value traps.  On the short side there are growth trends that can go long past the realm of reasonability.  But remember, it’s all relative.  A trader needs to know what the market is placing a premium on now.

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