Growth Stock vs. Value Stock: What’s the Difference?

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There are numerous technical terms and obscure buzzwords in the area of investment education. Stocks are typically divided in two different types: Growth Stocks and Value Stocks. During your investment research, you will certainly encounter these terms, frequently. After reading this article, you will understand the main differences and how to identify growth and value stocks. Moreover, you will have a better feeling on the up- and downside of both stock types. Let’s dive into it.
Growth Stock vs. Value Stock Difference

In a Nutshell: Value Stocks

Value stocks are often associated with Warren Buffet (the “Oracle of Omaha”) and his buy-and-hold investment strategy. Thus, it is not a big surprise that his holding company, Berkshire Hathaway, is also seen as a value stock. Other examples for value stocks are Procter & Gamble (U.S. consumer goods company) or Unilever (British consumer goods company). You will find value stocks by considering these characteristics:
  • Mature, well-established companies on the market
  • Steady (not outstanding and not highly fluctuating) growth in stock price, revenue and earnings
  • Dividends are usually paid (which is not a requirement)
  • Stock price does not (or not significantly) exceed the company’s intrinsic value
  • Companies that match all or a high number of these criteria are often classified as value stocks. By considering these aspects of a value stock, you can use some metrics in order to identify a value stock. First of all, the company size in terms of revenue will indicate whether the company is well-established or fast-growing on the market. Stock price, revenue and earnings should show a continuous growth trend with fluctuations below the average of its peer group. Companies in their growth stage often do not pay dividends as cash is required to reinvest and build up the business. Procter & Gamble as a prime example of a value stock paid its first dividend back in 1989 and since than increased from 0.0496 USD per quarter to 0.8698 USD per quarter in 2021. KPI’s like price-earnings-ratio (P/E ratio), price-to-earnings-to-growth ratio (PEG ratio), price-to-book ratio (P/B ratio) as well as the dividend yield will help you to arrive at the right conclusion. For risk-averse investors, value stocks are a great way to invest in single companies and not just ETF’s, whereby the upside potential is weak compared to growth stocks.
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    In a Nutshell: Growth Stocks

    In our search for a prominent representative for growth investing, we come across Catherine Wood (“Cathie Wood”), who has a full focus on disruptive technologies with ARK Invest. ARK investment products were showing an impressive track record in recent years, e.g. the ARK Innovation ETF (ARKK) gained around +150 % in the (Covid) year 2020. ARK Invest applied the growth strategy which offers high growth potential in stock price, revenue and earnings but also higher risk. These are the characteristics of a growth stock:
  • Companies in their growth stage, not yet well-established on the market
  • Outstanding revenue growth (typically at the expense of profit), high P/S ratio and P/E ratio
  • Low or zero dividends as cash is required to invest in further business development
  • Price does not reflect the current intrinsic value, future expectations are priced in
  • Investors will find growth stocks in the small-, mid- and (less frequently) large-cap sector. Prime examples include Snowflake (U.S. based big-data cloud company) or BioNTech (German biotech company known for its Covid vaccine marketed as “Comirnaty”). Both companies reported impressive revenue growth in recent years. Growth stocks are fully focussing on revenue growth, typically with no profit over many years. Therefore, the P/E ratio is not meaningful for growth stocks. Investors who invest in growth stocks hope to put potential tenbagger stocks in their portfolio – but the opposite of opportunity is threat. Let’s take the Tesla stock as an example: Today, Tesla is in the midst of it’s transformation to become a value stock with the first annual profit reported in 2020. But just one year before, the company was close to bankruptcy.
    The question which of both stock types is more attractive (value vs. growth) to investors cannot be answered in a blanket manner. It strongly depends on the investor’s risk appetite and the share of high-risk stocks already contained in the portfolio.

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