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Value Stocks vs. Growth Stocks

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Growth Stocks vs. Value Stocks
Thomas Anderton
MBA 570
Professor Scott

Growth stocks generally come from companies of high quality and who are considered successful. Investors expect the earnings of these companies to keep growing above the market average. If an investor were to analyze the companies with growth stock they would notice that these stocks have high price to earnings ratios and high price to book ratios. The price to earnings ratio shows the market price per share divided by the earnings. In order to have a high ratio generally the market price per share is high.
Value stocks are the exact opposite of growth stock in terms of their price per earnings ratio and their price to book ratio, which means they generally have low ratios. These companies are generally expected by investors to increase in value when the rest of the market recognizes their potential. According to Bryan Rich of Forbes, “Value stocks are stocks with the lowest P/E, price to book, price to sales and price to cash flow. Other twists on value investing are simply looking at the lowest priced stocks in a major index or stocks with the highest dividend yield in a major index” (Rich, 2016).
To some investors, growth stocks may seem to be expensive and at times overhauled, which could cause them to invest in value stocks. Investors may chase value stock because they don’t have as much money to invest as other investors who choose growth stocks. Some investors may choose to invest in growth stocks based off the name of the company they are investing in. For example, some investors will invest in Google or Apple based solely on the name and projects they are involved in. Value stocks can come from companies that have fallen out of favor in the market, or it is possible that they have been affected by problems that affect the way investors view their stock. These circumstances may cause investors to invest in growth stocks rather than value stocks.
The statistics that I pulled from an article on show that value stocks have beaten growth stocks in the long run. “Historically, going back to 1926, value outperforms growth. Dimensional Fund Advisors say value beats growth 60 percent of the time in a one-year period; 77 percent of the time in a five-year period; 88 percent of the time in a 10-year period; and 95 percent of the time in a 15-year period” (Cahn, 2015). Both types of stocks can have their ups and downs, but for an extremely long time now value stocks have been outperforming growth stocks.
I would probably use both methods, but I tend to lean towards the value stocks for a few different reasons. First, the price per share is much lower than growth stocks and I could start out buying more shares of value stock than growth stock. You could buy a larger share of the company with less money. Second, generally value stocks have a potential to make much more money than growth stocks. If you are looking to win big then value stocks are better because growth stocks generally continue to increase, but slower than value stocks do. Of course there is always the risk that the value stock never increases, or that too much value stock is purchased from companies that tank. This is why I believe that stock should be purchased of both value stock and growth stock, regardless of which you prefer.
According to Forbes, Warren Buffet started out buying good, profitable companies at cheap prices (Sizemore, 2013). This article discusses Joel Greenblatt and his magic formula, which is a stock screener designed by Greenblatt. This idea of buying good profitable companies at cheap stock prices is essentially value stock investing.
Cahn, J. (2015, September 1). Forbes . Retrieved from Should You Invest in Expensive Growth Stocks or Less Expensive Value Stocks?:
Rich, B. (2016, May 18). Forbes. Retrieved from Time to Buy Value Stocks:
Sizemore, C. (2013, July 16). Forbes . Retrieved from Why You Should Take Joel Greenblatt's "Magic Formla" Stocks Seriously :

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