Value - Growth Stocks Comparison
If a company manages to sustain a reliable and steady growth in its earnings, then investors will value the company more and will be willing to pay higher prices for its stock. So the valuation investors assign is usually connected with the profits the company will generate to its shareholders.
The prevailing attitude on the Wall Street is the purchase of stocks at low price and selling them at higher ones.
However, the perceptions over how low is low and how high is high generally differ.
Investors tend to look for either growth or value stocks.
If you are looking for a growth stock, then you will concentrate on stocks that have a long term potential for growth. They will pay the required price in return for this above the average earnings growth.
On the other hand, if you are looking for value stocks, then you are targeting hidden treasures that have been overlooked by the market. They are usually traded at a discount from their real valuation.
Depending on your long term financial goals you can choose either of these stocks or even the both of them.
Value Stocks Superiority over the Long-Term
There are many examples of the beneficial nature of value stocks over the long term. Since you are buying the stock at a lower price than its real valuation, over the long term you will enjoy higher returns.
Value stocks are not deprived from price fluctuations over the short term, but you have purchased the stock at a low price, which over the long term will increase and compensate for the short term fluctuations.
However, when you consider a value stock, you should carefully study the reasons for its lower valuation. Problems in the business fundamentals should represent a red flag to reconsider your decision.
On the other hand, if no problems can be found in the financial fundamentals of the company, there is a big likelihood that the price of the stock will be corrected over the long term to correspond to its real value.
When you select value stocks you should look at its P/E ratio. The best combination is a low value of the latter and a high earnings growth rate. However, this can rarely be the case, because high rates of growth in themselves attract the attention of growth investors, which will result in an increase in the price per share. However, there are many hidden treasures out there, waiting for you to discover them.
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