Do you know the difference between growth stocks vs value stocks? They may sound different but they are similar; yet different. That doesn’t really make sense right? Thankfully we’re going to break down what each type of stock does as well as give you examples of these stocks. Then you can look at potential stocks for your investment/trades.
Table of Contents
What is a Value Stock?
When learning about growth stocks vs value stocks, the title of value stock can be a little bit misleading. You might think it is a cheap stock or a lower-price stock. That is definitely not always the case.
The ‘value’ part of a value stock is in its multiples which is how many investors intrinsically value a company. Often value stocks are companies trading at multiples below what they are really worth.
Some common industries for value stocks include banks, retail, commodities, and utility companies.
Generally speaking, value stocks represent well-established and profitable companies. Another term that can be used almost synonymously with value stocks is blue-chip stock.
Some common metrics to measure whether a stock is a value stock or not include the book value, price to earnings, and cash flow. Do you want to find some value stocks for your portfolio? Check the Dow Jones Industrial Average which is made up of nearly all value stocks.
What is a Growth Stock?
Growth stocks on the other hand are believed to have the potential for immense future growth. In almost every way, these companies are the opposite of a value stock. Rarely are growth companies profitable right now as they re-invest any revenues into the growth of operations. Growth stocks also trade at multiples well beyond what is considered a reasonable valuation for a stock. This is because investors and the market are baking in future potential growth until the company is able to be profitable.
Growth stocks are often used interchangeably with tech stocks. While it’s true, most tech stocks are growth stocks, there are plenty of other sectors that can be considered growth sectors. Compared to value stocks, growth stocks are considered riskier and generally see more volatility in the price action. If you want to find some growth stocks to invest in, check out the NASDAQ which is a tech-heavy index.
Can a Growth Stock Become a Value Stock?
There is no defining price where a growth stock becomes a value stock. You can look at the things like cash flow, book value, or price to earnings, but there is no exact multiple at which this shift occurs.
Take Apple (NASDAQ: AAPL) for example. It is the largest company in the world by market cap, and also the most profitable company in the world.
But it is also a tech company that is still trading with growth stock multiples. That is because, despite its massive size, Apple still has the potential to grow even more moving forward.
You can debate whether or not the mega-cap tech stocks are growth or value companies. They are all uber profitable now and occupy the largest market caps in the world.
But these companies also trade at sky-high multiples which shows that investors think there is a lot more room to grow.
Perhaps one day, Apple will stop growing but given the nature of the industry, if a tech company stops innovating it will lose ground to its competition.
Famous Value Investors
As unpopular as it might be now, value investing makes up for a bulk of the world’s best-known investors. That is because when you have billions of dollars, you are better off putting them into stable, dividend-paying companies. It is riskier, as we are seeing these days, to put a bulk of your investing money into growth companies unless you have a very long-term investing horizon. Here are some of the best-known value investors!
Benjamin Graham
Graham has long been considered the father of value investing. His investing manifesto, “The Intelligent Investor”, is a must-read for any investor, no matter what your strategy might be. He was famous for his Mr. Market character who would offer stock prices to investors at different prices each day. It was an allegory for the short-term volatility of the stock market. Many have cited Graham as an influential figure in investing, but many of them also believe his style and beliefs are outdated now. Among those is the next name on the list.
Warren Buffett
The Oracle of Omaha is probably the most successful investor of our generation. His company Berkshire Hathaway has invested billions of dollars in American companies over the years. Buffett has stated that Benjamin Graham is the second most influential person in his life after his own father. Yet Buffett also said that if he only listened to Graham, he would be much poorer as an investor. Buffett is considered a value investor but one of the largest positions in his portfolio is Apple. This just goes to show that investors can have a healthy balance of both types of stocks.
Famous Growth Investors
To be a well-known growth investor, you have to have a high-risk tolerance and thick skin. Growth stocks can be volatile in the short term but have the potential to bring exponential gains over the long term. Growth investors are forward-looking and need to be agile in their holdings, especially if the investment thesis of a company changes. Here are some notable growth investors!
Cathie Wood
The founder of Ark Invest has been hailed as both a revolutionary investor and as washed up. I told you, thick skin is a requirement for a growth investor.
Her Ark ETFs are based around high-growth names with a minimum of a five-year investment plan. Unfortunately, right now, her ETFs are trading well below their recent price levels given the pullback in growth stock prices.
I still believe Cathie Wood has changed the way institutional investors think and once growth names bounce back, the sentiment around Ark Invest should as well.
Chamath Palihapitiya
This name might be a bit controversial given his recent track record, but there is no doubt about Chamath’s influence on investing. His investment firm Social Capital was involved in the SPAC craze of the past couple of years. Chamath has brought companies like Virgin Galactic (NYSE: SPCE), OpenDoor (NASDAQ: OPEN), and SoFi Technologies (NASDAQ: SOFI) to the public markets.
Examples of Value Stocks
In growth stocks vs value stocks, stocks that have value are trading for less than they’re worth. In essence, you’re getting them on sale. And who doesn’t love a good sale? I know I do. So getting value stocks are an attractive option to me.
Banking Stocks
Banks are the quintessential value stock. They are extremely profitable, trade at low valuations, and likely don’t have a lot of operational growth in the future. Bank stocks pay dividends and are much less volatile on a day-to-day basis. Some examples of great banking value stocks include JPMorgan (NYSE: JPM), Bank of America (NYSE: BAC), and Goldman Sachs (NYSE: GS). We also have a banking stocks list for more ideas in the bank sector.
Retail Stocks
Retail giants are also considered excellent value stocks to invest in. Many of these provide solid price action as well as dividend payouts. Look, everyone needs to buy clothes and groceries, so it’s not like retail stores are going away. Some excellent retail stocks for any portfolio include Walmart (NYSE: WMT), Costco (NASDAQ: COST), Home Depot (NYSE: HD), and Target (NYSE: TGT).
Other Value Industries
Value stocks can include anything from mining companies to utility companies. All of these stocks provide a nice cash flow to your portfolio, and the stability you need to establish a foundation for your investments. What are some other great value stock names? Adding companies like AT&T (NYSE: T), Alcoa (NYSE: AA), and Brookfield Asset Management (NYSE: BAM).
Examples of Growth Stocks
In learning more about growth stocks vs value stocks, we’re going to give you some examples of stocks to look at. Obviously, these stocks and sectors have great potential for growth. As a result, up-and-coming companies with good ideas can be great for growth potential.
SaaS Stocks
Software as a Service has been one of the hottest sectors to invest in. These are the quintessential growth companies as they invest heavily in operations to build out the network at the beginning of their life cycle. Eventually, all of these investments allow the company to reach profitability through recurring revenues and subscriptions. Take a look at stocks like Crowdstrike (NASDAQ: CRWD), the Trade Desk (NASDAQ: TTD), Atlassian (NASDAQ: TEAM), and ServiceNow (NYSE: NOW).
Electric Vehicle Stocks
Talk about a popular sector over the past couple of years. Electric vehicles have revolutionized the automotive industry and are trending towards a global shift in production. Every automaker has electric vehicles in their pipeline, from Ford (NYSE: F) to Ferrari. The EV sector is here to stay, and many of these companies are in their infancy in terms of global expansion. You know them all by now, but these stocks include Tesla (NASDAQ: TSLA), Nio (NYSE: NIO), Lucid Group (NASDAQ: LCID), and Rivian (NASDAQ: RIVN).
Big Tech Stocks
Mega-cap tech companies rule the markets right now. The biggest five or six companies have the biggest weighted impact on both the NASDAQ and the S&P 500. As scary as it is, these companies are priced to continue to grow into the future as well. Every diversified portfolio needs to have some exposure to Apple, Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Meta Platforms (NASDAQ: FB).
Conclusion
So is there a better way to invest? It all depends on your personal risk appetite, investment goals, and investing horizon. If you are younger and just getting started, it is less risky to invest in growth stocks compared to someone who is nearing retirement.
There is no right way to invest, but for stability and income stream, value stocks are rock solid to build around. But if you want future exponential gains and lottery picks, high-growth stocks are likely more what you should be looking at!
