Value investing vs growth investing are two mainstream investing strategies when it comes to investing in stocks. When it comes to evaluating which strategy is more impactful, understanding the characteristics of value stocks vs growth stocks is crucial, since they are quite different.
Value vs growth investing may be two different approaches to the stock market, but investors can be successful with either approach. More important whether you love value vs growth stocks in general is that you love and have confidence in the individual businesses you are investing in.
Value investing is an investing strategy where the investor purchases stocks, commodities, or assets at a price that is trading for less than their intrinsic value.
The idea that all stocks are perfectly priced all the time is incorrect.
Investors can let their emotions get the best of them and trade stock prices to much higher or much lower than the intrinsic value of the underlying business.
Although this may sound like an unusual occurrence, it happens all the time.
Take Herbalife, who is a multi-level marketing company that sells dietary supplements. A couple years ago the Federal Trade Commission (FTC) accused them of wrong doing and the stock dropped significantly.
The large stock price drop in Herbalife attracted value investors, like Carl Icahn, who believed any actions by the FTC would not impact the long-term intrinsic value of Herbalife. Over time the FTC actions resulted in a modest fine and over a period of time the stock price of Herbalife returned to its higher intrinsic value. All the value investors that bought during the stock price swoon were well rewarded.
Value investing takes patience and conviction.
It takes conviction that you have accurately calculated the intrinsic value of the business. And it takes patience to wait for the business value to increase closer to its intrinsic value. The average mutual fund portfolio manager who is getting evaluated on quarterly stock returns does not have the patience for value investing.
One of our favorite value stocks right now is PPL Corporation (ticker PPL).
PPL Corporation is a holding company for regulated utilities that they own in Kentucky, Pennsylvania, and the United Kingdom.
The market doesn’t appear to appreciate the complicated story of owning regulated utilities in the United States and the UK. And as a result, PPL is trading at a price to earnings ratio of 11X 2021 earnings estimates at a time when the utility sector in total is trading at closer to 18X earnings
What makes PPL attractive to value investors is that they recently announced that they will seek to sell their United Kingdom business soon which will transform them into a totally United Stated based business once the sale is completed
If the sale of the UK business actually occurs (and there is no guarantee that will actually happen), PPL should trade at a higher multiple, given that it will be a simpler, United States based business.
This is the essence of value investing. Waiting for the stock price of a business to reflect the actual value that should be assigned to it.
What will make investors a bit more patient waiting for PPL to be valued closer to its intrinsic value is the fact that PPL Corporation pays a dividend that equates to a 6% yield. So at least you are getting paid to wait.
Growth investing is an investing strategy where the investor purchases stocks in companies whose earnings are expected to consistently beat their industry competitors or the overall market.
For growth investors, it is all about finding businesses that operate in industries with large total addressable markets and how quickly the business will be able to grow as a result.
Growth investors believe that if the business is successful growing in an area with a large addressable market, they will be rewarded with a higher stock price as revenues and profits soar.
Think about Netflix (NFLX) five years ago when the idea of streaming video and television shows was just starting to take off. Netflix was quick to take the lead in this industry as investors caught on that streaming was not a fad but was in fact here to stay.
As a result of being a first mover in an industry with a large addressable market, Netflix has been more than a five-bagger over the last five years, going from under $100 per share to over $500 per share.
One of our favorite growth stocks right now is MercadoLibre (ticker MELI).
MELI is Latin America’s largest online marketplace operator, so it is sometimes referred to as the “Amazon of Latin America”. However, it does also have other businesses including a large payment processing operation, which is vital in Latin America given that many citizens do not have a bank account.
No doubt that online shopping and the move to a cashless society are both trends that are undeniable with lots of growth possibilities in the years and decades ahead.
Over the last ten years, MELI has grown its revenue from $217 million in 2010 to an estimated $3.8 billion in 2020. That is 17X growth in just ten years and that is why MELI is the perfect example of a growth stock.
But remember that being a growth investor is not about looking backwards at what happened. As a growth investor you are looking for businesses that will grow in the future at high rates, that will lead to a higher price in the underlying stock of the business.
Even when there is not a bull market for the stock indexes, there are always individual businesses doing well that will be of interest to growth investors. Particularly with interest rates so low, the ability to build wealth through stock price appreciation is key.
Stock market investors can be successful by investing in value stocks and growth stocks.
But you need to consider which form of investing strategy is right for you given your unique circumstance.
Use the descriptions above to help you determine the investing strategy that is right for you.
And use the stock examples above to help you start your research.