Growth vs. Value
| Growth | Value
| | Philosophy | Seeks stocks with earnings and/or revenues that are expected to grow at above market rates | Seeks stocks that, due to market inefficiencies, are mistakenly undervalued
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Expectation | Stock’s price rises as its growth trajectory takes off | Stock’s price rises to its fair, or intrinsic, value over time
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Looks for | Business dynamics that will fuel above-average earnings growth | Low P/E and price-to-book values
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Trades at | High multiples to earnings and cash
| A perceived discount to its intrinsic value
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Dividends | Pays no dividends | Dividend income is an important factor
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Returns | Capital appreciation | Both dividend yield and share price appreciation
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Risk | More volatile | Less volatile
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Script:
Now that we’ve gone through the basics of the fixed income markets, let’s turn our attention to equities. For the next few slides, we’re going to take a look at the different ways to slice and dice the stock market. We’ll start with a look at growth vs. value, and then talk about market caps, international stocks and cyclicals.
Imagine you’re a portfolio manager who’s got a brand new pool of investment money he or she needs to invest. How do you go about picking stocks for your fund? Over the decades, the job of picking the best stocks has evolved into two basic strategies: growth investing and value investing.
As this table shows [Point to table], growth stocks are expected to produce earnings and/or revenue growth over and above the average for their industry or for the market. Because these stocks are typically in the growth stage of the corporate lifecycle, any money that would otherwise go to paying out dividends is instead used to fund the company’s expansion. That means growth stocks rarely pay dividends. The growth investor looks solely to capital appreciation for returns.
Because of their perceived higher earnings potential, growth stocks tend to command higher prices than value stocks as measured by their P/Es and other ratios. The fact that they sometimes appear expensive or overvalued and that they don’t pay dividends makes growth stocks generally more volatile than value stocks. When the economy contracts and growth expectations aren’t met, growth stocks can often decline fairly rapidly.
Value stocks, on the other hand, [Point to table] are stocks that seem to be a good bargain at their current prices. Value managers spend a lot of time developing sophisticated models that sort through a company’s fundamentals in order to find companies that appear to be trading at a discount to their true (also called “intrinsic”) value. In this way, the value manager evaluates the worth of a company outside the context of the market itself.
The belief is that the value stock’s price has been temporarily depressed by some outside, non-fundamental factor (for example, a scandal or some other negative P.R.)—factors that have driven the company’s stock price down, but that won’t affect its ability to produce earnings over the long run. The value manager believes his or her stocks will rise to their true values if given enough time. Because of their lower multiples and higher dividend yields, value stocks tend to be less volatile than growth stocks.
From a portfolio perspective, value and growth stocks tend to go through cycles in which one style dominates while the other lags. These cycles can sometimes last several years. Because of this inverse relationship, there can be diversification benefits in the form of reduced volatility from having both value and growth allocations in a client portfolio. According to one study,* a 50/50% allocation to value and growth stocks will tend to deliver higher returns than strategies that favor one style over the other, or that try to time the value/growth cycle just right—and all with less risk.
*https://www.bernstein.com/public/story.aspx?cid=4884
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