Growth stock and value investing are two fundamental approaches, or styles, in stock and stock mutual fund investing. Growth stock and value investing defined…
Companies which have been able to outperform their peers in earnings and are expected to continue delivering high levels of profit growth. However, there are no guarantees that these companies will continue to outperform over time.
Demand for their products and services could change over time. A change in consumer preferences, tastes, new technologies and varying stages of the economic cycle could all have an impact on the revenue and profitability of growth stocks.
“Emerging” growth companies are those that have the potential to achieve high earnings growth but have not established a history of strong earnings growth.
What are the key characteristics of growth funds?
The key characteristics of growth funds are as follows;
Higher priced than the broader market. Investors are willing to pay high price-to-earnings multiples with the expectation of selling them at even higher prices as the companies continue to grow.
High earnings growth records. Growth companies may potentially continue to achieve high earnings growth regardless of economic conditions.
More volatile than the broader market. The risk in buying a given growth stock is that its lofty price could fall sharply on any negative news about the company, particularly if earnings disappoint.
These are companies that have fallen out of favor but still have good fundamentals. Value stocks also include stocks of new companies that are little known by investors.
What are the key characteristics of value funds?
Value Funds tend to be lower priced than the broader market. They are priced below similar companies in the industry and also carry somewhat less risk than the broader market.
Growth or value… or growth stock and value investing
As you can see from the chart value investing has outperformed growth over extended periods of time on a value-adjusted basis. Growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first to be hit when the economy is cooling.
Value stocks, are often stocks of cyclical industries and tend to do well early in an economic recovery but are typically more likely to lag in a sustained bull market.
So a good strategy might be to have a combination of growth and value stocks in your portfolio.
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