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Podcast Episode 12: Value vs Growth Stocks
Let’s talk a little bit about value stocks and growth stocks. Over the last year or so with all the COVID stuff happening, certain stocks did really well, and other stocks didn’t. It was really a bifurcated market and what really did well were growth stocks. So, we want to explain what the difference is because value stocks have caught up a bit with growth stocks.
What is a value stock? Basically, a value stock is where you believe that the value of the company is greater than the stock price today. Now I could tell you that growth stocks can be value stocks in that their stock price may be less than what you think they’re really worth.
Growth stocks are companies that have the potential to really outperform the overall market over time. Generally speaking, growth stocks have a higher price to earnings ratio and they are a little bit higher risk than a value stock. Before providing an example let me preface this with a disclaimer. We are not suggesting you buy any of the stocks we mention in this article, these are for educational purposes only. An example of a growth stock is something like Apple Computer over the last many years. Many of the technology stocks are considered growth stocks.
Growth stocks are focused on growing the share price and not so much worried about dividends. Value stocks are a bit more worried about paying the shareholder through dividends, which come through earnings. With growth stocks, a lot of the earnings, go back into the company, because they are reinvesting, investing in new technology, in new land or new whatever, so that they can grow. Which one is better? Really, there is no one that’s better or worse. It depends on where you are in life and how much risk you’re willing to take, because generally growth stocks carry higher risk than a value stock. You can imagine a stock like Proctor & Gamble (this is not a recommendation), but a stock like Proctor & Gamble is a value company and is not expected to grow by more than 2-5% a year. Whereas you get a stock like Google (this is not a recommendation) and you may expect them to grow by 10 or 15% a year, or maybe some of these microcap stocks. They may grow at 20 and 50 and a hundred percent a year. You go up the risk scale with growth stocks.
In the long run, which does better? It’s kind of a toss-up. Value stocks have outperformed the growth stocks by a little bit, but it also depends on what timeframe. Probably because of the dividends that they pay, especially if you reinvest the dividends. Over the last, maybe 10 years or so, really since the ’07, ’08, ’09 disaster with real estate, growth stocks have really outperformed. Especially in the last few years, in particular last year when you had the COVID problem where nobody was going out of the house, and everybody was online and getting things delivered.
The growth stocks, specifically the technology stocks just went up like crazy. By the way, there’s nothing black and white about this. Some stocks that people consider growth stocks, you also could say they’re value stocks or a value stock could be kind of growthy. The way Morningstar gets around it is they have three different classifications and Morningstar classifies these things you’re either growth, value or blended.
In summary there are basic differences between value and growth. Growth is just saying, “Hey, we’re going to grow at a much greater rate than a value company would grow. We’re not going to pay a lot of dividends”, certainly not in the beginning, in time, they do. Eventually the good growth company becomes a value company because you can’t grow a battleship twice as fast as a rowboat. You can turn that rowboat a lot faster than you can a battleship. Small companies grow faster than large. A great example is Sears back in the last century. In the 1900s, Sears was the biggest retail company in the world, and it was growing like gangbusters. Today, Sears went into bankruptcy, I think there may be a few stores left.
That’s what happens with stocks. That’s why there’s a time to buy and a time to sell. That’s why you have to know when a value stock is no longer appropriate or a growth stock is no longer a good thing to own, that’s a whole different discussion. Sears is a great example of one that went from growth to value to out of business. And believe me, most companies eventually go out of business. It’s hard. I look at a GE for instance, which has been around for forever and it’s still there, but the company keeps morphing. That’s what you need to do. You need to stay with the times.
This is just a summary of the podcast and does not include the Johnson & Johnson story. To watch the complete episode click on the image above.
Steve Wolff is a Managing Partner at WWM Financial in Carlsbad California.
Steve can be reached at 760-692-5190.
Disclaimer
This commentary on this website reflects the personal opinions, viewpoints and analyses of the WWM Financial employees providing such comments, and should not be regarded as a description of advisory services provided by WWM Financial or performance returns of any WWM Financial Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. WWM Financial manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Click on the image above to view Podcast Episode 11.
What is going on with GameStop?
Today, we’re going to talk a little bit about what the heck is going on with GameStop and Reddit and some of the other stocks that have gone crazy on the stock exchange over this last week. So, the story right now is that there seems to be a fight between the short-sellers and the buyers of GameStop, and there are other stocks that are doing the same thing. But let’s talk about GameStop because that seems to be the focal point of what’s happening.
Basically what’s going on is that there is a forum called Reddit, and Reddit is a discussion site on the internet where people talk about many things, but one of the the areas is called WallStreetBets. WallStreetBets has been pushing people to buy shares of GameStop. Why? Mainly they’re doing it because the stock was so heavily shorted.
Now, what does short-selling mean? Short-selling means you borrow stock from someone, you then go and sell it on the market, and eventually you have to go buy it back again. So theoretically, there is no limit to how much you can lose because when you buy it, you’ve got to buy it at whatever price the market’s at, and if the market keeps going up, and up and up you’re losing more and more and more. That’s exactly what was happening to some of these hedge funds, specifically Melvin Capital has been pointed out as one that has just been brought to its knees. It had a heavy position that was shorting GameStop. So they expected the stock to go down. Remember they borrow the stock and they have to buy it back at some point. So what they really want is for that stock to go down, they buy it back, and they’ve made money. But what happened is now that all these people on WallStreetBets are saying, “Buy GameStop, buy GameStop, buy GameStop,” and there’s more and more and more people driving the price of GameStop higher, eventually the short-sellers are saying, “Well, wait a minute. I’m losing my rear end on this, so I better start covering that short.” By covering, that means they have to buy it back. But meanwhile, they’re losing more and more money.
On the WallStreetBets site, there are a lot of people who’ve been just cheerleading this, and so a lot of the members of of this particular forum are saying, “We’re all gonna buy it and we’re going to stick it to the hedge funds.” Well, in fact, that’s exactly what they’ve done. And part of me says, “Yay,” because I don’t like it when stocks that I own get shorted, but there’s a reason that stocks get shorted. Mainly it’s because of valuations. A lot of people thought that GameStop was a very poor company and that it really wasn’t worth much at all. I think even some people who are on Reddit right now who are buying the stock might tell you the same thing. But they don’t care.
Now, I will tell you that I think that’s a dangerous game. And why is it dangerous? Because the last one in is going to get their head handed to them, and it’s almost a short squeeze in reverse. So a short squeeze, again, is when a company is shorted, lots of people go in and buy it, the price goes up and the shorts have to cover. When you’ve got lots of people who are buying a stock and it’s going up from what was at $5 or $10 a share to $500, $607 a share, those people who were buying at five or six or $700, they could be exposing themselves to a lot of loss because at some point in time, there has to be a real value for what the company is worth. If the company’s not making money, if the company is not doing well, at some point, that stock price should go down in a normal market. So, be very, very careful if you’re out there doing those things.
Now, the way this is really affecting the rest of the market is that those hedge funds are big. So when they’re losing money, what they have to do is because they’re borrowing money, they’re leveraged, and leverage is always the thing that hurts people. They’ve got to come in and either bring more cash in to cover those positions that they had shorted or they need to sell if they don’t have the money or sell other positions that they have to raise the money. So, what’s happening now is a lot of these hedge funds are starting to sell their winners. Their good stocks, the stocks that a lot of you may own. So there is some danger in that. Now, is it illegal? So far from what I’ve seen, it’s not necessarily illegal, but it’s pushing it because basically what they’re doing is saying, “Let’s all band together to move the price of the stock without any relationship to whether that makes sense or not.” Still not illegal, but I think it skirts the issue. So, the SEC is, of course, going to be investigating.
Meanwhile, one of the firms, Robinhood, which is one of the brokerage firms that a lot of the young people have been on, decided that they were going to stop trading in GameStop and some of these other stocks. The people on Robinhood were very upset. And I don’t blame them. All of a sudden the broker says, “Hey you can’t buy anymore.” I’m not sure that that’s fair.
So, basically what’s happened is you’ve had a giant short squeeze. Be careful though. If it were me, I would not be playing in this particular game because when it goes the other way, it’s going to go fast and this will not end pretty, one way or the other. So, as far as the overall market is concerned, this may be a cause for the market retracting a little bit as some of these stocks are being sold. I don’t think we’re in a recession or anything like that because so far the economic numbers that have come out have been pretty good. Most of the earnings numbers have been pretty good. So, not sure I would get too worried about what’s going on with the whole market. I do expect at some point there’s going to be a retracement of some of these gains. Nothing goes straight to the moon, including GameStop. So, be careful out there. And of course, if you have any questions, you can always give us a call or you can always contact me at WWMFinancial.com.
Steve Wolff is a Managing Partner at WWM Financial in Carlsbad California.
Steve can be reached at 760-692-5190 or click on the following link to contact https://wwmfinancial.com/contact-2
WWM Financial is an SEC Registered Investment Adviser. The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
WWM Financial is an SEC-Registered Investment Advisor
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
WWM Financial is an SEC-Registered Investment Advisor
Click on the image above to view Podcast Episode 6
Using Leverage To Buy Stocks
Podcast Episode 6
In this episode of Steve’s Stock Stories Steve discusses buying stocks and ETF’s with leverage.
You can reach Steve with any questions at 760-692-5190.
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
WWM Financial is an SEC-Registered Investment Advisor
Click on the image above to view Podcast Episode 5
Maintenance Man to Millionaire
Podcast Episode 5
In this episode of Steve’s Stock Stories we hear about how Lou the maintenance man invested his way to 7 figures.
You can reach Steve with any questions at 760-692-5190.
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
WWM Financial is an SEC-Registered Investment Advisor
