Tag Archives: Growth Stocks

Value vs Growth Stocks

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Value investors want to buy stocks for less than they’re worth. If you could buy $100 bills for $80, wouldn’t you do so? ~ Motley Fool

Most public equity stocks are classified as either value stocks or growth stocks. Generally speaking:

  • A value stock trades for a cheaper price than its financial performance and fundamentals suggest it’s worth.
  • A growth stock is a stock in a company expected to deliver above-average returns compared to its industry peers or the overall stock market.

Value stocks generally have the following characteristics:

  • They typically are mature businesses.
  • They have steady (but not spectacular) growth rates.
  • They report relatively stable revenues and earnings.
  • Most value stocks pay dividends, although this isn’t a set-in-stone rule.

Growth stocks generally have the following characteristics:

  • They increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole.
  • They developed an innovative product or service that is gaining share in existing markets, entering new markets, or even creating entirely new industries.
  • They grow faster than average for long periods tend to be rewarded by the market, delivering handsome returns to shareholders in the process.

Regardless of the category of a stock, economic downturns present an opportunity for a value investor. The goal of value investing is to scoop up shares at a discount, and the best time to do so is when the entire stock market is on sale.

References:

  1. https://www.fool.com/investing/stock-market/types-of-stocks/value-stocks/
  2. https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/

Focus on Growth (at a reasonable price) Stocks

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“You should be looking for the next great growth stock.” Olivier Garret, founding Partner and CEO of RiskHedge

Cheap” Stocks Are Often The Worst Stocks You Can Own

By “cheap,” we mean stocks that have a low stock price in relation to their sales or earnings. If a stock trades for $20/share and earns $4/share, it’s cheap. If it trades for $200/share and earns $4/share, it’s not cheap.

People are drawn to “cheap” stocks for the same reason they flock to the Macy’s Department store clearance rack. It feels good to get a deal. Americans love nothing more than getting lots of “bang for their buck.”

But in investing, this can be a dangerous mistake. These stocks are cheap for a reason! They’re usually in dying industries or are a declining business. So they’re either barely growing, or shrinking.

“Cheap” does NOT equal “safe” in the stock market. Focusing on “cheap” stocks is not a wise investment strategy. Instead, you should be looking for the next great growth stock at a reasonable price.

Growth Stocks

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett

Growth stocks are companies that increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole. Growth stocks are great buys, especially if you can identify those with fair valuations, excellent fundamentals and capitalize on their momentum. Focus on one of the fastest-growing companies on the planet.

In the current environment where each of these stock picks offers a good balance of growth and value, it’s a great play to diversify your portfolio.

Unlike the cheap stocks some growth stocks are growing like crazy.

High-growth stocks tend to be more expensive than the average stock in terms of valuation metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios. Yet, despite their premium price tags, the best growth stocks can still deliver fortune-creating returns to investors as they fulfill their awesome growth potential, according to Motley Fool.

Earnings Growth

Earnings and cash flow growth are arguably the two most important factor, as stocks exhibiting exceptionally surging profit levels and cash flow tend to attract the attention of most investors. And for growth investors, double-digit earnings and cash flow growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.

Impressive Asset Utilization Ratio

Asset utilization ratio — also known as sales-to-total-assets (S/TA) ratio — is often overlooked by investors, but it is an important indicator in growth investing. This metric shows how efficiently a firm is utilizing its assets to generate sales.

Investing in growth stocks can be a great way to realize life-changing wealth in the stock market. The key, of course, is to know which growth stocks to buy — and when, and to be patient.

Even renown value investor, Warren Buffett, uses an approach that swings towards growth. This quote from Buffett is a classic articulation of the strategy: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In other words, price is an important part of any investment, but the strength of the business arguably matters just as much, if not more.

References:

  1. https://www.forbes.com/sites/oliviergarret/2020/10/08/why-you-should-focus-on-growth-stocks-today/#72d1ee102b81
  2. https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/
  3. https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/how-to-invest/

Fear of Higher Interest Rates Ending Technology Stocks Growth

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Technology stocks have been the driving force behind the longest-running bull market in history.

The technology sector is vast, comprising gadget makers, software developers, wireless providers, streaming services, semiconductor companies, and cloud computing providers, to name just a few, according to Motley Fool. Any company that sells a product or service heavily infused with technology likely belongs to the tech sector.

And, the pandemic has been mostly positive for the tech industry. Companies like Amazon have thrived as consumers shifted hard toward e-commerce. Additionally, companies like Microsoft have also done well, buoyed by demand for collaboration software, devices, gaming, and cloud computing services as people spend more time at home.

Many of the most valuable companies in the world are technology companies.

Growth stocks have outperformed for 12 years and counting. Since the end of the Great Recession in 2009, growth stocks have been a driving force on Wall Street. Many of the most valuable companies in the world, like Apple and Microsoft, are technology companies.

Historically low lending interest rates and the Federal Reserve’s ongoing quantitative easing measures have created a pool of abundant cheap capital that fast-paced businesses have used to expand operations and investors have used to fuel the longest running bull market.

Technology stocks have been a key component of the market’s rising trend. Since the financial markets collapsed, demand for consumer electronics and related products and services has caused the tech sector to far outperform every other segment. 

However, revenue growth is starting to slow, although the delta variant surge may drive consumers away from stores once again. The economic dynamics favoring technology’s 12 year growth are changing.

Inflation is running rampant, and the Federal Reserve has indicated it’s become more hawkish on fighting it, indicating as many as three interest rate hikes may be in the cards calendar year 2022, effectively ending its loose money policy. Higher interest rates hurt growth stocks because growth stocks intrinsic value is based on the value of their future earnings. And, those future earnings are not worth as much if interest rates go up.

To best analyze tech stocks, first determine if the company is profitable or not.

For mature tech companies that produce profits, the price-to-earnings ratio is a useful metric. Divide stock price by per-share earnings and you get a multiple that tells you how highly the market values the company’s current earnings. The higher the multiple, the more value the market is placing on future earnings growth.

Many tech companies aren’t profitable, so the price-to-earnings ratio can’t be used evaluate them.

Revenue growth matters more for these younger companies.

If you’re investing in something unproven, you want to make sure it has solid revenue growth.

For unprofitable tech companies, it’s important that the bottom line be moving from losses toward profits.

As a company grows, it should become more efficient, especially when it comes to the sales and managing expenses. If it’s not, or if spending is growing as a percentage of revenue, that could indicate something is wrong.

Ultimately, a good tech stock is one that trades at a reasonable valuation given its growth prospects.

Accurately figuring out those growth prospects is the hard part. If you expect earnings to skyrocket in the coming years, paying a premium for the stock can make sense. But if you’re wrong about those growth prospects, your investment may not work out.

Thus, investing in technology stocks can be risky, but you can reduce your risk by investing only when you feel confident their growth prospects justify their often lofty price to earnings valuations.

References:

  1. https://www.fool.com/investing/2022/01/20/2-top-tech-stocks-ready-for-a-bull-run/
  2. https://www.fool.com/auth/authenticate/
  3. https://www.fool.com/investing/stock-market/market-sectors/information-technology/