Value vs. Growth Stock Investing
Many times, investing style determines what stocks you will buy, either personally or through mutual funds. Two major styles are “value” and “growth,” although, the delineation line is somewhat murky since some so-called value and growth funds have the same stocks.
Value stock investors try to spot more mature companies paying reasonably good dividends. Growth investors look for underpriced companies whose stock price is expected to grow to provide them with gains while dividends are not as big of a concern.
Value investors look at traditional valuation measures such as price/earnings ratios and dividend yields. They also look for stocks they expect to grow once the market either “corrects” or realizes their “mistake” of the lower stock prices. Meanwhile, they enjoy good dividends. They are not expecting dramatic growth, although, that sometimes occurs.
Growth companies have good cash flow with earnings and revenues increasing at greater rates than their industry peers or the overall market. Growth company investors expect the company to keep its cash to use internally to grow the company hoping that the increase would eventually be reflected in the price of the stock. Growth investors would look at return on equity averages (company net income divided by its common stock equity) as well as new products in the pipeline or previously untapped or just started expansion possibilities. Growth companies are usually smaller companies (but many growth funds have super large cap companies in their portfolios) with greater potential to benefit from a breakthrough that will be reflected in higher stock prices.
Question: Is Apple a growth or value company? What about IBM, Disney, Exxon, GE, Johnson and Johnson, Cisco and McDonald’s?
Style! It is subjective and differs from one person to the next.
Hey, no one ever said investing was easy.
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