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Podcast Episode 12: Value vs Growth Stocks

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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.


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