Education: Value Investing
Understanding Growth vs. Value
There are over 10,000 publicly traded companies that investors can choose from. That can be quite overwhelming, thus, they are typically broken down into many subcategories or investment styles. This makes it somewhat easier when picking from or analyzing similar stocks.
Growth and value are two different types of investment styles (there is also a third type which combines the two typically referred to as blend). Since 1928, one significantly outperformed the other. I can just hear you now, “Which one?” You will have to read on to find out.
Growth versus Value
Okay, I am going to make you sweat just a bit longer. It would probably be a good idea to first differentiate a growth stock from a value stock. Here is a quick thumbnail guide to help you distinguish between the two:
Typically grow earnings/revenues faster than the industry/market
Rarely pay dividends—prefer to reinvest excess cash
Usually have relatively high P/E ratios and P/B ratios
Said to be currently trading at a discount to their true value
Generally have high dividend yields
Usually have relatively low P/E ratios and P/B ratios
While every investor has their own specific definitions, the above broad classifications are accepted by most. But which camp has provided more wealth over time? It’s the value investors versus the growth investors. Let’s get ready to rumble…
And the Winner Is…
Eugene Fama and Ken French, two highly-respected scholars in the field of finance, created a set of growth and value data dating back to 1928. In a nutshell, the two used book-to-market ratios (the ratio of book equity to market equity) to define growth and value. And their study produced a clear winner (data through 2004).
Large Value: 11.9%
Large Growth: 9.2%
Small Value: 14.9%
Small Growth : 9.6%
Sure, there were years in which growth outperformed value, however, over the long term, value triumphed. To put this in monetary terms, $1 invested in each of the above-mentioned series at the beginning of 1928 would have produced the following (through year-end 2004):
Large Value: $5,642.25
Large Growth: $859.41
Small Value: $43,604.58
Small Growth: $1,164.55
The above tables present a very strong case for investing in value stocks—particularly small-cap value stocks. Please keep in mind that the dollar values are the result of 77 years of compounding. That is a very long time. The power of compounding can be quite impressive over long periods of time.
But how can you find value stocks that will produce similar impressive returns? That’s the million-dollar question.
Screening for Gold
There are numerous web sites offering various screening tools to help with your stock search. At Zacks.com we offer a few that are extremely valuable as well.
Our free online screening tool allows you to screen with 96 attributes, including by P/E ratio, P/B ratio and market capitalization. Click here to access the custom stock screener. Furthermore, we offer a number of predefined screens to help with your analysis—including a Top Value screen. Click here to investigate these. Lastly, our Research Wizard software allows subscribers to pick from over 650 different fundamental data items. Click here to learn more, and for a free trial offer.
When screening for your value stocks, don’t forget to include the ever-so-important Zacks Rank. Stocks with a Zacks Rank of 1 are likely to experience a considerable amount of price appreciation in the near future, most likely fueled by positive earnings surprises. Combining a healthy Zacks Rank with some sort of value screen you deem appropriate, is an excellent strategy for value investors to utilize Learn more about the Zacks Rank
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Zacks Method for Trading: Learn to spot and trade Value Stocks yourself, step by step. Find out more.