Growth Slams Value
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Here’s a chart that compares “growth” stocks with “value” stocks.
Why take the time to compare these two?
Well, as a trader, I focus all my attention on growth stocks – simply because Wall Street places such a higher value on growth.
High-growth companies tend to receive more attention and premium prices – and this in turn creates accelerated upside moves that create tradeable opportunities.
It’s not a hard argument to prove.
Rapid growth means premium prices. With premium prices, growth stocks have a higher price-to-earnings (P/E) ratio – making them look less like a value play.
- Amazon’s growth is the reason Wall Street gives it a trailing P/E ratio of 81.
- Netflix’s growth is the reason for its P/E ratio of 134.
- Salesforce’s growth gives it a trailing P/E ratio of 111.
Now compare those growth names with some of your typical value (or slow-and-steady growth) plays…
- 3M Company, which carries a trailing P/E ratio of 20.
- IBM, which carries a trailing P/E ratio of 15.
- American Express, which carries a trailing P/E ratio of 15.
Which sector do you think offers more intraday trading opportunities?
Of course, the answer is the growth sector, and this leads us to today’s chart. As you can see above, Barron’s recently plotted the Russell 1000 Growth Index and the Russell 1000 Value Index.
These indexes seem to mirror each other. However, what’s telling is the fact that the growth index has intensified moves on both the upside and the downside. You can see this happened in 2000 – and also from 2015 to the present.
When you think about it, this relationship makes total sense. After all, value stocks are ones that investors think will appreciate over time. It can take months or even years for a large group to collectively agree that a certain stock has value.
Growth stocks, on the other hand, are happening now. And it’s not hard for a large group of traders to all move in (or out) of a stock that’s rapidly growing as we speak.
Barron’s summarizes this point…
Value investing is all about patience. Over the past decade, large cap growth funds tracked by Morningstar have returned 15.6% a year on average, versus 13.2% for large cap value funds.
From a trading perspective, the immediacy of growth is what you want to target because the trigger catalysts occur in real time. And those catalysts cause oversized moves that traders like us want to focus on. That’s where the money is made.
So with that, leave value investing to the slowpokes at the bingo parlor. We want growth – because that’s where all the best action is.
About Bryan Bottarelli
Bryan graduated with a business degree from the highly rated Indiana University Kelley School of Business, and his first job out of college was trading stock options on the floor of the Chicago Board Options Exchange. He was mentored by some of the country’s top floor traders in the heart of the technology boom from 1999 to 2000, where he learned to identify and implement some of his most powerful trading secrets. Now he shares his secrets with a group of elite traders. We will be republishing some of his highly sought after content from his free e-letter, Trade of the Day.