Value v/s Growth Investing: A closer look - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Value v/s Growth Investing: A closer look

Apr 2, 2007

One of the most important developments in equity management during the last decade has been the creation of portfolio strategies based on "value" or "growth" oriented investment style. It is now common for money management firms to define themselves as "value stock managers" or "growth stock managers" when selling their services to clients.The distinction between value and growth investing can be best appreciated by considering the thought process of a representing manager of each style. Growth stocks are companies that will have positive earning surprises and above average risk adjusted rate of return because the stocks are undervalued. Value stocks are those that appear to be undervalued for reasons other than economic growth potential. Analyst identifies value stocks as stocks having low P/E or low P/BV. In this article we try to look into how a value investor and growth investor looks at the PE ratio.

Price to earnings ratio is defined as: Current price per share/Earnings per share.

Where EPS measure can be based on either current or future performance of the firm. In broad terms, value and growth managers will focus on different aspects of this equation when deciding whether a stock should be added to an existing portfolio.

Specifically a growth-oriented investor will:

  • Focus on EPS component of a PE ratio and its economic determinants.

  • Look for companies that expect to show rapid EPS growth in future.

  • Assume that PE ratio will remain constant over the near term meaning that stock price will rise as forecasted earnings growth is realised.

On the other hand, a value investor will:

  • Focus on price component of a PE ratio. He must be convinced that the price of the stock is cheap by some means of comparison.

  • Not care a great deal about the current earnings or fundamental driver of earnings growth.

  • Assume that the PE ratio is below its natural level and that the market will soon correct this situation by increasing the stock price with little or no change in earnings.

In summary the growth investor focuses on the current and future economic story of a company with less regard to valuation. The value investor, on the other hand, focuses on the share price in anticipation of a market correction and possibly improving company fundamentals.

The conceptual difference between the value and growth investing may be reasonably straight forward, but classifying individual stocks into appropriate style is not always simple in practice. Since detailed company valuations are time consuming to produce, most analysts rely on most easily obtained financial indicators- such as P/E, P/ BV, Dividend yields and EPS growth rates- to define both an individual equity holding and style of benchmarking portfolios.

Although investors appear to pay somewhat more attention to growth-oriented strategies, research has shown that a value approach to portfolio management tends to provide superior returns. It is tempting to conclude that value is unambiguously superior to growth as an investment style. However it is important to note that, although value investing produces higher average returns than growth investing, this does not occur with much consistency from one investment period to another.

Equitymaster requests your view! Post a comment on "Value v/s Growth Investing: A closer look". Click here!


More Views on News

Top 5 Recent IPO Developments You Should Know (Views On News)

May 12, 2021

So far in 2021, IPOs in India have raised nearly US$ 3 bn, the best start to the year since 2018.

How Did Mindtree Perform in Q4FY21? (Company Info)

Apr 20, 2021

Here's the rundown on the company's latest quarterly results.

Axis Quant Fund: Targets Quantitative Approach to Generate Alpha (Outside View)

Jun 16, 2021

PersonalFN analyses the features of Axis Quant Fund and explains the potential this fund has to offer to its investors.

Shadow Inventories and Commodity Trading (Fast Profits Daily)

Jun 16, 2021

Should you be worried about shadow inventories while trading commodities? Find out...

99.5% of Stocks Fail on this Metric but Forever Stocks Don't (Profit Hunter)

Jun 16, 2021

How I rejected a company a decade ago that I believed could've been the next Page Industries.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 16, 2021 (Close)