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Value Stocks vs. Growth Stocks

Growth and value stocks are commonly used terms related to stock investing. The following article provides clarification on the meaning and characteristics of these stocks so that you are facilitated in your choice of each of them and the times when it is most appropriate to invest in them.

Growth and value investing represent two different ways of investing, whose borders are much blurred. We will provide you with their characteristics and unique qualities.

Whether one is better than the other is questionable since each of them has experienced times when they have outperformed each other. Therefore, we recommend diversification to be applied and both types to be included in the investment portfolio in the appropriate proportions.

Growth Stocks

As mentioned above, growth stocks are growing in price and show their potential for further future growth. In order to classify a particular stock as a growth one, you should look for the following signs:

  1. Growth stocks show sound growth rate

    Growth stocks should provide a stable record of past growth. Additionally, they should show sings for future projected growth.

    You should observe different rates for small companies and for big companies. For small companies you should look for around 10% or more growth rate for the previous five years and search for approximately the same percentage for projected growth. On the other hand, big companies should show a record of 5% to 7% growth rate for the past five years and almost the same percentage for projected growth.

    However, you should keep in mind that over the long term big companies are to grow more slowly than smaller ones.

  2. Growth stocks show sound Return in Equity (ROE)

    You should make a reliable comparison between the stock and its peers form the same industry or sector over a five-year time period.

  3. Growth stocks show sound Earnings per Share (EPS)

    When you evaluate a growth stock you should pay attention to its pre-tax profit margin. The latter should be more than the five-year average and the average for the industry in which the company operates. Check whether the company transfers sales to earnings. Additionally, see whether the management team controls the costs that are incurred.

When evaluating the type of the stock see whether it meets these criteria and apply your common sense in order to make a more reliable judgment. Remember that a particular stock may not show all of these signs but still be a growth stock.

Additionally, check the projected price of the stock. Most analysis of a particular stock price is made on the basis of the business model and market position of the company that issues the stock. You should consider whether the stock has the potential of doubling its price over a five-year time period.

Value Stocks

 Most investors search for value stocks among those that have been with a very low price for a long time. Generally viewed as hot deals, most investors hurry to purchase them while they are on their low levels before the market has corrected their price. However, you should keep in mind that they may not be that cheap as you probably expect.

In order to classify a particular stock as a value one, you should look for the following signs:

  1. Value stocks show low P/E

    P/E (Price to Earnings) ratio should not exceed that of the 10% lowest observed in the companies of the same industry or sector.

  2. Value stocks show less than 1 PEG

    In order to be sure that the stock is really under-priced, its PEG (Price to Earnings Growth Ratio) should be no more than 1.

  3. The equity of the company should be approximately equal to its debt.
  4. The liabilities should be half the amount of the company's assets.
  5. The price per share of the stock should be less or equal to the tangible book value.

There are many other criteria to determine whether a stock is of a value type. However, these ones are the basic and if present you can be certain to a great extent that the stock is of a value type.

Final Piece of Advice

In summary, growth stocks are those that are growing and show potential for future growth. On the other hand, value stocks are those, which the market has overlooked and as a result their price is low and about to increase when the necessary market corrections occur.

It is recommendable that you include both value and growth stocks in your investment portfolio to take advantage of the benefits of diversification.

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