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Series 65 Exam Tutor

Growth versus Value - Two Different Styles of Investing

Value Investing

The core of value investing is buy low when times are bad and sell high when times get better. The buy low part is "low valuation", meaning

Low price to earnings or

Low price to book or

Low price to sales or

low price to whatever

The low valuation can be versus the overall stock market or versus its industry or versus its own historical valuations. Another characteristic of value stocks is that they tend to have above market level dividends, mostly because they do not have such great growth opportunities. These stocks also have the following characteristics: they are under followed by Wall Street and they generally not very popular. Historically, you have found value stocks in the following sectors: financials, industrials, etc.

Growth Investing

Growth investors take the opposite approach in that they look for companies that do not have any problems and that have very high earnings growth - Google - Amazon - Facebook. These are the larger growth stocks. Most people would probably never even heard of the smaller ones. When a company is smaller its earnings growth tends to be substantially higher than when it is older. There are lots of small and mid cap growth stocks, especially in the technology and healthcare sectors.

From a test perspective, the most important characteristic of a growth stock is their high valuations:

High price to earnings or

High price to book or

High price to sales or

High price to whatever

Growth investors do not intentionally seek out expensive stocks but that is what they end up buying because they are willing to pay more due to their high earnings growth.

Growth stocks are popular stocks that do not pay dividends, as paying out dividends would not be a good use of their cash. Instead, growth companies use their earnings to expand their technologies or buy other company's etc.

Whether someone is a growth investor or a value investor, the goal is the same, capital appreciation. These investors just take a different approach to get there.

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