Investing for growth or value |
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Finding a bargain stock 'on sale'
In contrast to a growth stock, Sandager says, value investors select stocks with lower-than-average price-to-book or price-to-earnings
ratios and/or high dividend yields.
"The value investor buys a stock because it is undervalued,
or worth more than it is selling for currently," says James D. Cantrell,
principal of Financial Strategies Inc., in Brookfield, Wis.
To determine if the stock is undervalued, Cantrell says, the investor looks at the fundamentals of the company.
Fundamentals include P/E and P/B ratios, as well company management, the health of the company, and current and expected cash flows.
When something about these fundamentals suggests that the company is selling for a price lower than it is worth, the stock is said
to be undervalued.
Vasavda suggests that value stocks may be stocks of companies that have matured or have fallen out of favor due to
recent poor earnings growth. Because of this past performance, he says, they tend to cost less relative to their current earnings
than other stocks. In these instances, you may be able to buy the stock at a discount because of slow previous growth or because
the stock is not known or recognized in the market.
Which style is better for the investor?
When evaluating the merits of growth and value, an investor needs to look not only at performance, but also volatility over the
long term. Historically, research shows that value stocks have outperformed growth stocks over most periods of time.
Joss emphasizes that value and growth will both do well over time, but they will perform differently, and may outperform
or underperform the other at different times. He points out that even in recent decades there has been considerable fluctuation in
the performance between these two styles. "In the late '90s, growth won. In the early '90s and early 2000s, value won."
Sandager notes that over long market cycles, an investor may achieve similar returns no matter which style he chooses,
but notes that each style alone will subject you to a lot of volatility.
Hedge your bets with both
For the investor who wants long-term performance and limited volatility,
a combination of value and growth makes sense within a well-diversified
portfolio. Trying to guess which style will be in or out of favor
at a given time is difficult, if not impossible, says Jane Abitanta,
principal of Perceval Associates Inc., in New York. She says that
an investor should grill his or her adviser on the adviser's philosophy of growth,
value and timing.
"I'd want to know the adviser's view on mixing growth and value, particularly as it relates to diversification,"
Abitanta says. "I'd be wary of an adviser who tried to time the strategies ... a mix of both is a prudent approach."
The fact that one type of investing usually outperforms the other simply makes the case that a good portfolio
holds both.
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