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The age-old investing is, question, should you chase growth, or buy value stocks? After an extended period of underperformance, the value factor made a major comeback in 2022.
Should we expect the same for 2023 or will growth and technology stocks start to make a comeback?
Value vs. Growth
There are a few different definitions of value and growth so I will cover them here and share a few stock recommendations based on the different definitions. A categorical definition would divide them by business type and culture. A value-type company is usually an older, slower growth business that produces consistent free cash flow. Think of something like Procter and Gamble. It probably offers a dividend and may forgo reinvesting profits for growth, as the opportunities have diminished and will favor distribution of cash to shareholders.
A growth company, usually has high and increasing sales growth, is technology focused and can reinvest capital because of the tremendous Total Addressable Market of their product or service. This is Amazon (AMZN - Free Report) , or Mongo Databases (MDB - Free Report) .
Another definition is more technical. A value investment is usually something with a low Price to Earnings ratio because its growth prospects are lower, while a growth investment has higher P/E considering its high sales growth trajectory.
But if something like Apple (AAPL - Free Report) , traditionally considered a growth company, were to trade at a significantly lower price, and subsequently a lower P/E ratio, it could potentially be considered a value investment. And wouldn’t that be a great opportunity?
Performance
The charts below show the comparative performance between Vanguard’s Value ETF (VTV - Free Report) , and their Growth ETF (VUG - Free Report) . Over the last two years you can see how much value outperformed growth, especially impressive considering how challenging 2022 was. And below that, the long-term chart shows after a massive 5-year outperformance by growth, the returns have nearly converged. Worth noting is these returns include dividends, which make up a considerable portion of returns from the Value fund.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
If you had to ask me which investment style, I thought would perform better in 2023 my guess would be value. I think markets will continue to face considerable uncertainty this year, and the steady nature of value stocks will provide a smoother, low risk investment this year. But of course, I may very well be wrong, so I will share some stocks that show up in both Zacks filters.
Value
Using Zacks filters I conducted a search for value focused companies. One of the first to jump out at me was The Geo Group (GEO - Free Report) . GEO is a government contractor specializing in the development and support service of secure facilities, processing centers, and community reentry centers internationally. Simply put, they build and run prison facilities.
GEO currently sports a Zacks Rank #2 (Buy), and not surprisingly, an A Value score. It trades at a TTM P/E of 4.3x, well below the industry average of 16.5x. FY 2022 sales are expected to grow at 4.6%, and FY 2023 sales are forecasted to grow 6.3%, based on Zacks estimates. 2022 earnings are projected to gorw 0.4% YOY, while 2023 estimates expect earnings to shrink by 5.6%.
Interesting to note is that famous investor Michael Burry is a significant holder of the stock. While well known for shorting the housing market in 2008 he is also an avid value investor and holds nearly 40% of his fund in GEO currently.
Image Source: Zacks Investment Research
Another classic value stock is Berkshire Hathaway. (BRK.B - Free Report) might be the prototypical value company. Always spitting off tons of cash and looking to invest in companies that do the same.
Berkshire currently scores a Zacks Rank #1 (Strong Buy) given its upward earnings revisions. BRKB is expected to grow sales 8% in 2022 and 2.5% in 2023. Earnings are even more impressive projected to grow 22.5% in 2022, and another 11.9% gain in 2023.
Warren Buffett and his holding company are coming into 2023 following a very impressive performance in 2022. While the market was down 18%, Berkshire Hathaway fell only marginally. And that is why you invest in value. The years when the broad market is up, you don’t do anything spectacular, but when the market is down you get to sleep easy. And that is when performance really matters.
Image Source: Zacks Investment Research
Growth
Transdigm (TDG - Free Report) , an aerospace and defense company that designs, produces, and supplies aircraft components in the United States and internationally, must be one of the most interesting and successful stocks in recent history. Since its IPO in 2006 the stock has compounded at 27.5% annually, and since 2008 is up 3778% vs the S&P 314%. Over that same period TDG has outperformed the likes of AMZN, GOOGL, and AAPL.
Image Source: Zacks Investment Research
Transdigm’s sales and earnings forecasts are just as impressive. FY 2023 sales are projected at 11.5% and earnings are forecasted to grow 26.4%. And the stock price outperformed the market in 2022 as well finishing the year up ~2%. You’re going to have to pay up for an epic company like TDG though. Transdigm’s TTM P/E is 45x, well above the industry average of 28.4x, and the S&P 18x.
Image Source: Zacks Investment Research
Both?
How about a stock that fits both value and growth criteria? Cal-Maine Foods (CALM - Free Report) , the largest producer packager, and distributor of shell eggs in the US fits into both styles.
While conducting my searches using Zacks screener tool I looked for both value and growth. CALM came up on both the growth and value screen. It boasts a very impressive Zacks Rank #1 (Strong Buy), and As across the board in Value, Momentum, and Growth style scores.
Image Source: Zacks Investment Research
With tailwinds of inflation, as well as a historic bird flu, egg prices are skyrocketing, and CALM is benefiting from it. Over the last 90 days CALM has had its 2024 earnings estimates increased by 56%.
Image Source: Zacks Investment Research
Conclusion
Considering value and growth when investing in a stock is consideration and can have a major impact on investment portfolios. But an interesting quote by sage investor Charlie Munger has always stuck with me. “All good investing is value investing.” And he makes a good point. The goal is to buy securities for less than you think they are worth. Whether it’s a fast-growing company or slow the fundamentals don’t change.
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Best Investment for 2023: Value vs. Growth?
The age-old investing is, question, should you chase growth, or buy value stocks? After an extended period of underperformance, the value factor made a major comeback in 2022.
Should we expect the same for 2023 or will growth and technology stocks start to make a comeback?
Value vs. Growth
There are a few different definitions of value and growth so I will cover them here and share a few stock recommendations based on the different definitions. A categorical definition would divide them by business type and culture. A value-type company is usually an older, slower growth business that produces consistent free cash flow. Think of something like Procter and Gamble. It probably offers a dividend and may forgo reinvesting profits for growth, as the opportunities have diminished and will favor distribution of cash to shareholders.
A growth company, usually has high and increasing sales growth, is technology focused and can reinvest capital because of the tremendous Total Addressable Market of their product or service. This is Amazon (AMZN - Free Report) , or Mongo Databases (MDB - Free Report) .
Another definition is more technical. A value investment is usually something with a low Price to Earnings ratio because its growth prospects are lower, while a growth investment has higher P/E considering its high sales growth trajectory.
But if something like Apple (AAPL - Free Report) , traditionally considered a growth company, were to trade at a significantly lower price, and subsequently a lower P/E ratio, it could potentially be considered a value investment. And wouldn’t that be a great opportunity?
Performance
The charts below show the comparative performance between Vanguard’s Value ETF (VTV - Free Report) , and their Growth ETF (VUG - Free Report) . Over the last two years you can see how much value outperformed growth, especially impressive considering how challenging 2022 was. And below that, the long-term chart shows after a massive 5-year outperformance by growth, the returns have nearly converged. Worth noting is these returns include dividends, which make up a considerable portion of returns from the Value fund.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
If you had to ask me which investment style, I thought would perform better in 2023 my guess would be value. I think markets will continue to face considerable uncertainty this year, and the steady nature of value stocks will provide a smoother, low risk investment this year. But of course, I may very well be wrong, so I will share some stocks that show up in both Zacks filters.
Value
Using Zacks filters I conducted a search for value focused companies. One of the first to jump out at me was The Geo Group (GEO - Free Report) . GEO is a government contractor specializing in the development and support service of secure facilities, processing centers, and community reentry centers internationally. Simply put, they build and run prison facilities.
GEO currently sports a Zacks Rank #2 (Buy), and not surprisingly, an A Value score. It trades at a TTM P/E of 4.3x, well below the industry average of 16.5x. FY 2022 sales are expected to grow at 4.6%, and FY 2023 sales are forecasted to grow 6.3%, based on Zacks estimates. 2022 earnings are projected to gorw 0.4% YOY, while 2023 estimates expect earnings to shrink by 5.6%.
Interesting to note is that famous investor Michael Burry is a significant holder of the stock. While well known for shorting the housing market in 2008 he is also an avid value investor and holds nearly 40% of his fund in GEO currently.
Image Source: Zacks Investment Research
Another classic value stock is Berkshire Hathaway. (BRK.B - Free Report) might be the prototypical value company. Always spitting off tons of cash and looking to invest in companies that do the same.
Berkshire currently scores a Zacks Rank #1 (Strong Buy) given its upward earnings revisions. BRKB is expected to grow sales 8% in 2022 and 2.5% in 2023. Earnings are even more impressive projected to grow 22.5% in 2022, and another 11.9% gain in 2023.
Warren Buffett and his holding company are coming into 2023 following a very impressive performance in 2022. While the market was down 18%, Berkshire Hathaway fell only marginally. And that is why you invest in value. The years when the broad market is up, you don’t do anything spectacular, but when the market is down you get to sleep easy. And that is when performance really matters.
Image Source: Zacks Investment Research
Growth
Transdigm (TDG - Free Report) , an aerospace and defense company that designs, produces, and supplies aircraft components in the United States and internationally, must be one of the most interesting and successful stocks in recent history. Since its IPO in 2006 the stock has compounded at 27.5% annually, and since 2008 is up 3778% vs the S&P 314%. Over that same period TDG has outperformed the likes of AMZN, GOOGL, and AAPL.
Image Source: Zacks Investment Research
Transdigm’s sales and earnings forecasts are just as impressive. FY 2023 sales are projected at 11.5% and earnings are forecasted to grow 26.4%. And the stock price outperformed the market in 2022 as well finishing the year up ~2%. You’re going to have to pay up for an epic company like TDG though. Transdigm’s TTM P/E is 45x, well above the industry average of 28.4x, and the S&P 18x.
Image Source: Zacks Investment Research
Both?
How about a stock that fits both value and growth criteria? Cal-Maine Foods (CALM - Free Report) , the largest producer packager, and distributor of shell eggs in the US fits into both styles.
While conducting my searches using Zacks screener tool I looked for both value and growth. CALM came up on both the growth and value screen. It boasts a very impressive Zacks Rank #1 (Strong Buy), and As across the board in Value, Momentum, and Growth style scores.
Image Source: Zacks Investment Research
With tailwinds of inflation, as well as a historic bird flu, egg prices are skyrocketing, and CALM is benefiting from it. Over the last 90 days CALM has had its 2024 earnings estimates increased by 56%.
Image Source: Zacks Investment Research
Conclusion
Considering value and growth when investing in a stock is consideration and can have a major impact on investment portfolios. But an interesting quote by sage investor Charlie Munger has always stuck with me. “All good investing is value investing.” And he makes a good point. The goal is to buy securities for less than you think they are worth. Whether it’s a fast-growing company or slow the fundamentals don’t change.