Key Takeaways
- Growth stocks generally offer the investor the ability to, over time, grow their cash flows and generate a bigger return in a manner that does not wholly represent their assets’ current book value.
- GARP (Growth at a Reasonable Price) is an equity investment strategy wherein growth and value investing attributes are combined.
- Value stocks are typically bigger, well-established companies that trade under the price that analysts believe the stock is worth, contingent upon whether the comparison basis is the benchmark or financial ratio.
Investors who wish to hone or rethink their strategy often do not know how value and growth stock investing differ and may not even be clear on what the strategies are. To remedy that, here is an in-depth look at value versus growth investing — and which one comes out on top.
Value vs Growth Investing
When taking stock market positions, investors generally go back and forth in terms of which approach is best. Value stocks are basically those that possess lofty book-to-market-value ratios, and growth stocks as those that possess low book-to-market ratios. The idea is that the prices of value stocks are low compared to their intrinsic value – their book value – but because they are known for high yields, they are thus viewed as undervalued.
On the other hand, growth stocks generally offer the investor the ability to, over time, grow their cash flows and generate a bigger return in a manner that does not wholly represent their assets’ current book value.
Value Stocks Overview
Value stocks are typically bigger, well-established companies that trade under the price that analysts believe the stock is worth, contingent upon whether the comparison basis is the benchmark or financial ratio.
To illustrate, say a stock’s book value is $25 per share based on the total number of outstanding shares divided by the company’s capitalization. Thus, if the stock trades for $20 per share at that time, it would be considered as a positive value move.
Note that there are a myriad of reasons why stocks can become undervalued, including due to public perception. Perhaps there’s a big scandal involving a company’s leader, for example.
Value stocks usually trade at a discount to either cash flow ratios, book value, or price-to-earnings. Because the outlooks are fallible, some stocks are categorized as a mix of the classifications.
Examples of value stocks include Eli Lilly and Co., JPMorgan Chase, and Co., AT&T, and Altria Group, Inc.
Growth Stocks Overview
Such stocks can prospectively perform better than overall markets or, for a period, a certain subsegment of them. Growth stocks, which can be found in cap sectors of all sizes, may only be considered as such until analysts believe they have gained their potential.
Growth companies are those that are deemed to have favorable chances of expanding over the near term, either due to the expected success of a product or lineup or to the appearance that the company’s core competencies could allow it to edge out competitors.
Examples of growth stocks include Apple, Amazon, Microsoft, Alphabet, Meta, and Abercrombie & Fitch.
Then there is GARP (Growth at a Reasonable Price), which is an equity investment strategy wherein growth and value investing attributes are combined. GARP investors seek out companies with earnings growth that exceeds broad market levels but sans very high valuations.
Value vs. Growth Stocks Differences
There are key differences between value and growth stocks, to wit:
- Price. While value stocks are undervalued and priced under the wider market, growth stocks are overvalued, with prices exceeding the broader market.
- Earnings. Value stocks have low P/E values while growth stocks feature high earnings growth.
- Risk. Value stocks are comparatively stable with minimal volatility, while growth stocks are riskier with more volatility.
- Dividends. Dividend yields are generally higher, compared to minimal or no dividend yields for growth stocks.
- Growth vs GARP investing. Frequently, growth investors are open to paying for growth, the price notwithstanding. By contrast, GARP investors are just willing to meet a reasonable growth price.
Value vs Growth Stocks Similarities
There is some overlap between growth and value. A prominent example is mutual funds, which include both categories. That is largely due to a distinction that is not concrete: a stock can ultimately evolve from growth to value, and vice versa.
What is the Stock Market Breakdown of Growth vs. Value?
For the S&P 500, growth stocks last year dropped 30%, while value stocks markedly outpaced growth the entire year. In general, technology and consumer discretionary — sectors often considered growth — comprise 40% of the index.
Overall, growth stocks have experienced a positive run for the last decade or so, largely due to large tech companies.
What Typically Performs Better?
It is during bull markets, up-trending corporate earnings, and falling interest rates that growth stocks tend to perform better. Such stocks tend to lag behind value, though, during economic slowdowns. Also, value stocks are more apt to outperform growth amid bear markets and the first stages of economic recovery.
How to Know What Strategy is Right for You
Investors may wish to focus on growth stocks if:
- They are disinterested in current income from holdings. Because most growth companies tend to reinvest available cash back into their business to spur quicker growth, they want to skirt paying a lot of dividend income to shareholders.
- They are fine with big stock price changes. When a company is doing better than expected, the price of growth stocks can go way up. The opposite is also true.
- They feel good about their ability to pick eventual winners in emerging industries.
- Their time horizon is long. It can take growth stocks awhile to realize all their potential.
On the other hand, value stocks may be more appealing if investors:
- Seek current income from holding: A number of value stocks yield quite a bit of cash as dividends to stockholders.
- Seek less volatile stock prices. The prices of value stocks tend to remain relatively stable.
- Look deeper than price. It is frequently the case that some stocks are cheap for a good reason. Perhaps, for example, the company is no longer sufficiently competitive.
- Need immediate payoffs. If a company is successfully moving in a positive direction, its stock price can swiftly rise.
How to Start Diversifying
While some investors may choose one investment strategy over the other, having a mix of asset types can mitigate risk, protect against economic instability, and even improve returns.
Investors can begin diversifying through Yieldstreet, an alternative investment platform that offers accessible and highly vetted private-market strategies for value as well as growth, with consistent returns.
The inherently volatile stock market requires constant investor monitoring and often causes a great deal of stress. To offset that, investors are increasingly turning to stock market “alternatives.” Basically any assets other than stocks or bonds, alternatives run the gamut from real estate and art to structured notes and private credit.
Yieldstreet offers those and more, including growth and value opportunities. In fact, the platform, on which $4 billion has been invested, has the broadest selection of alternative asset classes available. After all, portfolio diversification is key to long-term investing success.
Alternative Investments and Portfolio Diversification
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
Learn more about the ways Yieldstreet can help diversify and grow portfolios.
In Summary
Ultimately, whether a value or growth stock strategy is best must be assessed through the prism of the investor’s risk tolerance and time horizon. Investors may also benefit by going beyond classifications and creating a mix that ensures a diversified portfolio.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
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