Growth traders and investors are primarily focused on stocks with aggressive earnings growth or revenue growth (or at least the potential for aggressive growth), which should propel their stock price higher in the future.
You'll often find smaller-cap stocks in this category because these are typically newer companies that are in the early part of their growth cycle. But you'll also find mid-caps and large-caps in the category as well.
Growth stocks can carry a higher degree of volatility. But they are also known for producing spectacular returns.
Growth Style - Learn more about the Growth Style
Value investors and traders favor good stocks at great prices. This does not mean they have to be cheap in price however.
The key is the belief that they are undervalued. That they are, for some reason, trading under what their true value or potential really is. And the value investor hopes to get in before the market 'discovers' this and moves higher.
A value investor will typically have a longer time horizon of 6-12 months or more. Value stocks are also typically associated with being less volatile.
Value Style - Learn more about the Value Style
Momentum traders and investors look to take advantage of upward trends or downward trends in a stock's price or earnings.
We've all heard the old adage, "the trend is your friend." And who doesn't like riding a trend? Momentum traders believe that these stocks will continue to head in the same direction because of the momentum that is already behind them. In fact, studies have shown that stocks making new highs have a tendency of making even higher highs.
Momentum stocks, like growth stocks, can also carry a higher degree of volatility. Although the momentum trader expects the gains made because of this, to make it all worthwhile.
Momentum Style - Learn more about the Momentum Style
Income investors are generally looking for companies with stable earnings growth that pay a solid dividend.
Oftentimes, these companies are more mature, larger-cap companies that no longer have the kinds of spectacular growth rates like some of the younger or smaller companies, or like they themselves had when they were younger and earlier in their growth cycle. Many of these companies are generating huge amounts of cash, but because of their size, may not have the growth opportunities they once had.
Income investing is typically considered to be a more conservative style of trade, if done right. And the income investor will typically look to hold onto his or her stocks for a longer period of time.
Income Investing - Learn more about Income Investing
Trading Style: Value
One of the keys to successful trading is to get into stocks that are in alignment with who you are as a trader. Gladly most people fit into one of the four main investing styles: Growth, Value, Momentum and Income. This page is dedicated to the value style. Watch the short video below and read education material underneath to learn the habits of successfully trading with value stocks.
Value investors and traders favor good stocks at great prices. This does not mean they have to be cheap in price however. The key is the belief that they are undervalued. That they are, for some reason, trading under what their true value or potential really is. And the value investor hopes to get in before the market 'discovers' this and moves higher.
"Value investors and traders are looking for good stocks at great prices that are trading under what their true value or 'fair value' really is."
Many institutional investors focus on this very thing.
Typical value investors will look at valuations like P/E ratios, PEG ratios, Price to Book ratios, and more.
Too many so called 'value' stocks however, have low valuations because they don't have compelling enough earnings or growth rates to speak of. So it's not enough to just look for the stocks with the lowest valuations. They might be low for a reason. Or worse, they might be damaged in some other way. These types of stocks are not value stocks. And they are definitely no bargain.
The key for value stocks is really earnings, which is the basis of most valuation models. When the Zacks Rank signals a Strong Buy or Buy (Zacks Rank #1 or #2), that means earnings estimates for a stock are rising.
Given this new information, other investors will likely view the stock as being undervalued relative to its future prospects. So, they jump in, which in turn drives the price of the stock higher. And as additional upward earnings estimate revisions come in, the fair value of the stock moves up along with it.
The Value Score further helps separate the wheat from the chaff by identifying the stocks most likely to outperform by doing a deep dive on their valuation measures. Those with a Score of A or B rate the best on these metrics and help identify the truly discounted names. When combined with the Zacks Rank they create a powerful combination for finding value stocks ready to move.
The beauty of the Zacks Rank is that it is also a timeliness indicator, meaning that value investors can use it to identify precisely when company's prospects are beginning to improve as opposed to waiting and waiting until it becomes obvious to everyone else. And nothing can make an investor sit up and take notice of a stock faster than rising earnings estimates.
Although, one should plan on holding onto these value gems a little longer than the typical Growth or Momentum investor as the stock unfolds from undervalued to fairly valued. As long as it remains a Zacks Rank #1 or #2 (or even #3) with a Score of A or B, you can confidently do so to maximize your upside returns.
But once it changes to a Zacks Rank #4 or #5, or a Score of a D or an F, it's time to get out. That means the earnings estimate picture has changed or their valuation components are no longer considered undervalued and it's time to pull your profits.
"Now I have more investing opportunities than I have cash because of Zacks' terrific system. My only regret is that I didn't find Zacks sooner."
- Jim Rosiak of Taylors, SC