Value or Growth Stock


T

Turtle

Hi everyone,
living in Germany Mutual Funds often are calle the same in english,
however I never really understood what the difference between Value and
Growth Stocks is.

Value Stocks in finance, are stocks that appreciate in value and yield a
lower return on equity (ROE). Instead of paying dividends it reinvests.
They are cheap. But they aren’t penny stocks are they?

Growth Stocks in finance, are stocks that appreciate in value and yield
a higher return on equity (ROE). They are more expensive. It pays dividends?

But is there also a diference between the asset classes? Can one say one
is conservative and the other is not?

Thanks in advance,
John
 
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J

John A. Weeks III

Turtle said:
Value Stocks in finance, are stocks that appreciate in value and yield a
lower return on equity (ROE). Instead of paying dividends it reinvests.
They are cheap. But they aren’t penny stocks are they?
No, they are not penny stocks. Stay away from penny stocks unless
you really know what you are doing (ie, if you have to ask this
question, you are not a candidate for penny stocks).
Growth Stocks in finance, are stocks that appreciate in value and yield
a higher return on equity (ROE). They are more expensive. It pays dividends?
They can pay dividends, but most likely, they reinvest for growth.

The difference is that a value stock is normally a company that
once did well, but is beaten down for some reason. The theory is
that there is more value in the company than what the stock price
shows. If you get in cheap, and the company turns around, you can
do very well.

A growth stock is a company that is still in the process of making
it big the first time.

A value stock is one with a track record over time, but the recent
record is either not so good, or shows a turn-around. A growth
stock doesn't have a long term track record, but the recent record
is good. In fact, it is often so good that the stock gets hyped
and is selling at a higher price than what its numbers might suggest
is reasonable.

-john-
 
T

Turtle

Hi John

You wrote the first explanation that makes sense to me.

Have a good New Year,
John
 
E

Elle

John A. Weeks III said:
A growth stock is a company that is still in the process
of making
it big the first time.
For the OP in particular: I do not consider "growth" to be
this black-and-white. Some very old companies may in fact be
considered growth ones. Harley-Davidson (HOG) company is
over 100 years old, but it is listed as a "large growth"
stock at morningstar.com.

Realize that, while companies like www.morningstar.com will
label a company "value" or "growth" or "core," these terms
are subjective. Also, a company may be said to move back and
forth between the categories.

Morningstar noted in a February, 2006 article:
"Some people think a growth company is any business with
earnings growth of at least 15%; others argue that it's a
company growing faster than its industry. It seems some
folks even equate growth stocks just with the technology
industry. At Morningstar, our definition is simple: It's any
business with wonderful investment
opportunities--opportunities for investing capital at high
rates of return."

At the following March 2006 Morningstar link, the author
even points out that it's not worth making a distinction
between value and growth:
http://news.morningstar.com/article/article.asp?id=157493&_QSBPA=Y

For more perspective, go to www.investopedia.com 's
dictionary, and type in "value stock" and then "growth
stock," and consider its definitions. Try the same via
googling.
 
S

Sandra Loosemore

Turtle said:
Hi everyone,
living in Germany Mutual Funds often are calle the same in english,
however I never really understood what the difference between Value
and Growth Stocks is.
"Value stocks" are stocks that are "on sale", or priced attractively
compared to the book value of the company's assets or current
earnings. Sometimes this happens when the company is facing legal
trouble or business setbacks, or just when investors are all off
chasing some other market sector. You might buy a value stock if you
think these are temporary factors and the company is going to continue
to churn out earnings.

"Growth stocks" are stocks that are "expensive" compared to current
assets or earnings, but where invetors think the company's business or
market segment has the potential to grow rapidly. A lot of technology
companies fall into this category, for instance. You might buy a
growth stock if you think the company is going to make a lot of money
in the future, even if they're not making a lot of money now.

-Sandra
 
T

Tad Borek

Turtle said:
Hi everyone,
living in Germany Mutual Funds often are calle the same in english,
however I never really understood what the difference between Value and
Growth Stocks is.
John,
"Who's asking?" There are all kinds of subjective definitions out there.

In finance theory, the most common definition is based on a ratio: the
book value divided by the market value of a stock ("BtM", book to
market). This is the definition Eugene Fama & Kenneth French used to
sort stocks, in their research that determined that value stocks had
outperformed growth stocks over most of the history of the US stock
market, as well as several foreign markets. Google FAMA FRENCH VALUE for
info on that.

But even that has subjective components. Like, where to draw the line?
E.g. do you divide stocks into one or the other, as some value/growth
indices do, or do you select a percentage that have the highest BtM? Do
you define it by number of stocks (10% of the Russell 3000 = 300 stocks)
or do you define it by market cap (10% of the Russell 3000's market cap,
whatever # of stocks that is). Also, it's common to adjust book value in
the calculation, to reduce the impact of accounting standards in setting
"book value" of a stock, so that affects the sorting as well.

Next most common method is based on price-to-earnings ratio, with
low-P/E stocks being called value and high-P/E stocks called growth
(those in the middle ground might be labeled "core" or "neutral" or some
similar term). This also has many subjective aspects to it - such as
adjustments to earnings based on accounting standards, and looking at
trailing vs. predicted earnings when sorting stocks by P/E.

Dividend yield used to be used more as a sorting criteria, but that's
less common because dividend doesn't signal much in US stocks anymore.
It might be more useful with German stocks where, IIRC, dividend
policies are more tied to earnings because of securities laws there. But
I can't recall a recent study of growth vs. value that used dividend
yield. There have been some that combine these three factors (BtM, P/E,
and yield), and I think some of the newer stock indices are constructed
this way.

-Tad
 
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B

beliavsky

Tad said:
John,
"Who's asking?" There are all kinds of subjective definitions out there.
I agree with Tad that there is no bright line separating "growth" and
"value" stocks -- there is a continuum. The same can be said for small
cap vs. large cap stocks, although at least here the criterion (market
capitalization) is clear-cut.

Therefore IMO value stocks and growth stocks do not represent separate
"asset classes", as they are often termed, nor do small cap stocks and
large cap stocks. I don't believe in asset allocation models that
prescribe a static mix of x% in large growth stocks, y% in small value
stocks, etc. What makes more sense to me is one of the following
(1) buying a total stock market index fund -- if one does not believe
in the value of small cap effects -- and there are some academics who
still do not.
(2) buying an actively-managed all-cap blend fund where the portfolio
manager has the freedom to target the segment of the stock market he
finds most attractive
(3) dynamically changing the weights allocated to small and large cap
stocks or growth vs. value stocks based on a measure of their
attractiveness. I think I have seen a study showing that the difference
in earnings yield between large cap and small cap stocks predicts
future differences in returns. A paper on timing value vs. growth,
which can be obtained by emailing the authors through their site, is
cited at the end of this message.

The same argument applies, with less weight, to domestic vs. foreign
stocks. It's not clear to me that they are distinct asset classes.

By contrast, stocks and bonds represent distinct asset classes IMO. For
one thing, their correlation to each other is lower than the
correlation of small cap to large cap stocks, and the correlation can
even be negative.

http://www.aqrcapital.com/index.php?xpose=content.research
Asness, Cliff, Jacques Friedman, Robert Krail and John Liew, 2000,
"Style Timing: Value vs. Growth", Journal of Portfolio Management,
Spring.
Style Timing: Value versus Growth Is Value Dead?
Summary
A large body of both academic and industry research supports the
long-term efficacy of value strategies for choosing individual stocks.
However, value strategies are far from riskless. They can have long
periods of poor performance. In an effort to improve upon these
strategies, researchers have tried to forecast these returns with mixed
results. Most of these "style timing" models are based on
macroeconomic factors. We take a different approach considering two
simple factors: (1) the spread in valuation multiples between a value
portfolio and a growth portfolio (the value spread) and (2) the spread
in expected earnings growth between a growth portfolio and a value
portfolio (the earnings growth spread). We find that the bigger the
value spread and the smaller the earnings growth spread, the better our
forecast for value versus growth going forward. These results are
statistically and economically strong. Finally, our current (November
1999) predicted one-year return of value versus growth is near the
highest in history.
 
T

Turtle

Hi Tad,
Tad said:
It might be more useful with German stocks where, IIRC, dividend
policies are more tied to earnings because of securities laws there. But
I livehere in Germany and DAX is what I used as a Benchmark.

wishing you a Happy New Year,
John
 
T

Turtle

Hi Beliavsky,
Tad Borek wrote:
Therefore IMO value stocks and growth stocks do not represent separate
"asset classes",
I understand that now.

as they are often termed, nor do small cap stocks and
large cap stocks. I don't believe in asset allocation models that
I do compare it it with small cap stocks and large cap stocks though.
stocks, etc. What makes more sense to me is one of the following
(1) buying a total stock market index fund -- if one does not believe
in the value of small cap effects -- and there are some academics who
still do not.
which supports efficient market hypothesis (EMH)
(2) buying an actively-managed all-cap blend fund where the portfolio
manager has the freedom to target the segment of the stock market he
finds most attractive
which contradicts efficient market hypothesis (EMH)

wishing you a Happy New Year,
John
 
J

Jose Bailen

(2) buying an actively-managed all-cap blend fund where the portfolio
which contradicts efficient market hypothesis (EMH)

The EMH is NOT inconsistent with some types of investment yielding a
higher return than other types. Stocks yield a higher return than bonds
over the long-run, yet this is perfectly consistent with the EMH. What
the EMH says is that, if you select investments with a higher return
-i.e., small cap value stocks- then, in an equilibrium, these
investments will also face higher risks.
 
T

Turtle

Jose said:
The EMH is NOT inconsistent with some types of investment yielding a
higher return than other types. Stocks yield a higher return than bonds
over the long-run, yet this is perfectly consistent with the EMH. What
the EMH says is that, if you select investments with a higher return
-i.e., small cap value stocks- then, in an equilibrium, these
investments will also face higher risks.

but the EMH pushes more for an passively-managed market (like index
funds) Is that not true?

CU
John
 
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J

Jose Bailen

but the EMH pushes more for an passively-managed market (like index
funds) Is that not true?
Index funds are not inconsistent with EMH/getting a better return than
the market average. It all depends on how you design the index. You may
design a micro cap or small cap value indexed fund with higher return
than the market average, even for these categories of assets. Of
course, the drawback is that, in equilibrium, you have to accept higher
volatility of the returns, i.e., higher risk.
 
T

Turtle

Jose said:
Index funds are not inconsistent with EMH/getting a better return than
the market average. It all depends on how you design the index. You may
design a micro cap or small cap value indexed fund with higher return
than the market average, even for these categories of assets. Of
course, the drawback is that, in equilibrium, you have to accept higher
volatility of the returns, i.e., higher risk.
I also dont think index funds are a guarantee for beter returns, rather
more for protection (and the TER is much lower than normal funds)

Happy New Year,
John
 
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J

Jose Bailen

I also dont think index funds are a guarantee for beter returns, rather
more for protection (and the TER is much lower than normal funds)
I agree that index funds are not a guarantee of better returns, but
neither are conventional, actively managed funds. At least, index funds
have the advantage of their relatively low management fees, and because
they usually have a lower asset turnover, they are more tax efficient.
 

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