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.
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Growth Stocks vs Value Stocks Introduction
When learning about growth stocks vs value stocks, the title of value stock can be slightly misleading. You might think it is a cheap stock or a lower-priced stock. That is 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 multiples below what they are worth.
Some common industries for value stocks include banks, retail, commodities, and utility companies.
Generally speaking, value stocks represent well-established and profitable companies. Blue-chip stock is another term that can be used almost synonymously with value stocks.
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 comprises nearly all value stocks.
What Is a Growth Stock?
On the other hand, growth stocks are believed to have the potential for immense future growth. These companies are the opposite of a value stock in almost every way. 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 a reasonable valuation for a stock. This is because investors and the market are baking in future potential growth until the company can be profitable.
Growth stocks are often used interchangeably with tech stocks. While it’s true that most tech stocks are growth stocks, plenty of other sectors 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, 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 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 the most profitable company in the world.
But it is also a tech company still trading with growth stock multiples. That is because, despite its massive size, Apple still has the potential to grow even more.
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, showing investors think there is much 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, value investing makes up for most 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. As we are seeing these days, putting the bulk of your investing money into growth companies is riskier unless you have a very long-term investing horizon. Here are some of the best-known value investors!
1. 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, regardless of your strategy. He was famous for his Mr. Market character, who offered stock prices daily to investors at different prices. 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 also believe his style and beliefs are outdated. Among those is the next name on the list.
2. 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 stated that Benjamin Graham is the second most influential person in his life after his 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 shows that investors can have a healthy balance of both types of stocks.
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Famous Growth Investors
To be a well-known growth investor, you must 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 a company’s investment thesis changes. Here are some notable growth investors!
1. Cathie Wood
The founder of Ark Invest has been hailed as both a revolutionary investor and 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 five-year investment plan. Unfortunately, her ETFs are trading well below their recent price levels, given the pullback in growth stock prices.
I still believe Cathie Wood has changed how institutional investors think, and once growth names bounce back, the sentiment around Ark Invest should also be.
2. 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 with 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 is an attractive option for me.
1. 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.
2. 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. 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).
3. Other Value Industries
Value stocks can include anything from mining companies to utility companies. 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).
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Examples of Growth Stocks
In learning more about growth stocks vs value stocks, we will give you some examples of stocks to look at. These stocks and sectors have great growth potential. As a result, up-and-coming companies with good ideas can be great for growth potential.
1. 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, 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).
2. 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, from Ford (NYSE: F) to Ferrari, has electric vehicles in their pipeline. The EV sector is here to stay, and many of these companies are in their infancy regarding 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).
3. Big Tech Stocks
Mega-cap tech companies rule the markets right now. The biggest five or six companies have the biggest weighted impact on the NASDAQ and the S&P 500. As scary as it is, these companies are also priced to continue to grow into the future. Every diversified portfolio needs to have some exposure to Apple, Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Meta Platforms (NASDAQ: FB).
Final Thoughts: Growth Stocks vs Value Stocks
So, is there a better way to invest? It depends on your risk appetite, investment goals, and investing horizon. If you are younger and just getting started, investing in growth stocks is less risky compared to someone 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!
