Risk
Growth and Value Investing: What's Your Style?
by Michael Luftman (Write for us!)
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Just as people shop for clothes according to personal tastes, some people select stocks, mutual funds, and investment divisions of variable contracts by styles.
Two of the most popular investment styles in today's markets are "growth" and "value" investing.
The prices of stocks change every day. Over a month or two, an individual stock's prices can rise or fall 10%, 20% or more. In a bull (optimistic) market, growth stocks are often viewed as the equivalent of premium brands. Value stocks, on the other hand, are often viewed as the equivalent of low-priced, generic brands. Of course, in a bear (pessimistic) market, the opposite might be true.
Everyone wants to own "growth stocks" that keep rising in price, but, over time, stocks that keep going up in price become quite expensive. Conversely, stocks that have fallen in price might become the equivalent of "bargain basement specials" - or "value stocks."
EPS and PE
Each quarter, publicly traded companies report how much profit they have earned after expenses and taxes. Assume that a company earns profits of $1 per quarter for each share of stock issued to investors. In this case, the company would be said to have "Earnings Per Share" (EPS) of $4 per year.
Stock market analysts then compare the stock's current market price per share to its EPS. For example, suppose this same stock is now selling for $80 per share. The ratio of stock price to EPS is $80 to $4 or 20 to 1. Analysts abbreviate this as a "Price Earnings (PE) ratio" of 20.
Take a look at this chart to see some of the main characteristics of growth and value stocks:
| Growth | Value | | Companies | In-favor companies with steady earnings per share (EPS) growth | Out-of-favor companies selling at an attractive price | | Price/Earnings Ratio | Above stock market or industry group average | Below stock market or industry group average | | Upside Potential | Good, if EPS keep growing | Good, if company turns around or gains favor with investors | | Downside Risk | Fairly high if EPS disappointsv | Moderate, provided the manager is patient | | Generally Perform Best During | Up market | Flat to down market |
You may be wondering, "which is better - growth, or value?" Well, the answer to that is "it depends" - on several factors such as: Each style has its "time to shine." And, while past performance is not a guarantee of future results, the performance of growth and value stocks has varied from year to year, with long-term results being fairly close.
Work with your financial planner to determine your risk tolerance and how growth stocks, value stocks, or a combination of both, may work into the mix of your portfolio.
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