Growth vs Value Trades: Learn Both for Optimal Portfolio Growth
There are strong supporters on each side regarding growth vs value trades. The reason for this being stocks are often split into two categories – either growth or value.
What’s more, when analysts talk about the market, they are often comparing how growth vs value trades are performing. And as a result, investors latch onto the idea of owning one group or the other.
Although this may be true, history has shown us that either group can outperform the other depending on the time frame. For example, a 1997 study shows how value stocks outperformed growth from ’75 to ’95 in 12 of 13 markets.
But times are changing, and if you are following the markets, you know how dear growth stocks are to investors. In fact, over the past five years, the Russell 1000 Growth is up 209%, while the Russell 1000 Value is up 68%.
At the same time, this is only looking at one aspect of the market. ETFs can be deceiving as they can be carried by one of two leaders while breadth lags.
Keep reading to learn more about growth vs. value trades and which is best for you.
Breaking Down Growth vs Value Trades
The great growth vs value debate is as old as the markets themselves. Investors choose sides, and it’s often like a line in the sand.
Growth stocks are generally younger companies with high future earnings potential. Although they may be growing rapidly, growth stocks tend to be unprofitable as they put cash back into the company to promote growth.
Value stocks, on the other hand, are the opposite. Investors view these companies as being on sale compared to their actual value. Investors will use metrics like Price-to-Earnings (P/E) and Book Value to determine a company’s actual worth.
In addition, value stocks often offer attractive dividends to lure investors. You can then reinvest the dividends, giving value stocks a further boost.
While growth investors focus on future earnings, value investors look for undervalued companies. Neither strategy is perfect as there are no guarantees when it comes to the stock market.
Having said that, a diverse portfolio with leaders from both groups can help deliver steady returns over time. Because economic policy heavily influences assets, owning the best in each class can balance your account while promoting growth in any environment.
Examples of Growth Stocks
Unless you were living under a rock in 2020, you probably heard growth stocks mentioned somewhere. Whether from a friend or on the news, growth stocks had a breakout year and continue showing momentum in 2021.
Part of the reason behind the success of growth stocks last year is due to economic changes. For instance, the Fed cut interest rates and started a QE program. As a result, companies can borrow money for cheaper, leading to stimulated activity.
With this in mind, here are a few examples of growth stocks to give you a better idea.
- Tesla (Nasdaq: TSLA)
- Nvidia (Nasdaq: NVDA)
- Alphabet (Nasdaq: GOOGL)
- Cloudflare (NYSE: NET)
Tesla is a classic example of a successful growth stock story. I remember all the “doom and gloom” talk about Tesla and how it would never turn a profit in 2019 and early 2020. Then, Tesla vehicles started appearing everywhere as demand shot through the roof for the premium EV maker.
The EV maker is now up over 1600% in the past three years.
Not only that, but Tesla’s top line is growing rapidly as EVs are becoming a priority to promote a cleaner earth. In the past four quarters, Tesla’s revenue has increased by over 45% year-over-year (YOY) in each of its last four quarters.
Examples of Value Stocks
Value stocks are on the other end of the spectrum than growth. Investors will look for undervalued companies based on underlying factors.
Stocks can be undervalued for several reasons. First, they may have had a bad earnings report. If the company misses expectations, it can dramatically affect stock prices in some situations. Even more, if the company lowers guidance, investors will sometimes look for other opportunities.
At the same time, this can offer a chance for investors to own a strong company at a reasonable price. Below you can find a few examples of value stocks.
- Berkshire Hathaway Class B (NYSE: BRKB)
- JP Morgan Chase (NYSE: JPM)
- Proctor & Gamble (NYSE: PG)
- Walt Disney (NYSE: DIS)
Warren Buffet is the perfect example of a value investor. He picks stocks for Berkshire Hathaway’s portfolio that fit his criteria. As you can see, these stocks are fundamentally different compared to the growth stocks.
According to Berkshire’s latest filing, the company is buying Chevron (NYSE: CVX), Royalty Pharma (Nasdaq: RPRX) and Floor and Décor Holdings (NYSE: FND). All of which are trading at significantly lower EV/revenue than last year. For example, Chevron’s EV/Revenue dropped from over 7 to 1.68. And Floor and Décor Holdings went from 14.70 to now 4.44.
The EV/R metric is helpful when determining if a company is undervalued or not. So, as these companies are becoming fundamentally cheaper, investors like Warren Buffett are scooping them up.
Which Is Better Growth vs Value Trades
When it comes to growth vs value trades, neither style is perfect. At times growth stocks will outperform value, and other times it will be the opposite.
The most important thing to keep in mind is the quality of the business you are buying into. Value investors don’t buy stocks just because they are cheap. They buy them because of their value.
And the same goes for growth stocks. Investors don’t buy these assets because the stock looks interesting. They buy it because of the future earnings potential.
At the same time, there are other factors to consider, like how long you plan on investing and your risk tolerance. But, keep in mind, a mixture of both value and growth can promote steady returns over the long term.
In general, buying the leaders in both groups seems to be the best strategy rather than putting all your eggs in one basket or the other.
About Pete Johnson
Pete Johnson is an experienced financial writer and content creator who specializes in equity research and derivatives. He has over ten years of personal investing experience. Digging through 10-K forms and finding hidden gems is his favorite pastime. When Pete isn’t researching stocks or writing, you can find him enjoying the outdoors or working up a sweat exercising.