Many investors think in binary terms. Often times, that means when looking at a particular stock, they tend to distinguish between whether it is a “value” or “growth” stock. Value investors like to focus on companies with low valuations — whether based on the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio or something similar. Growth investors, on the other hand, focus on things like earnings growth, expecting share price to follow profits higher. #-ad_banner-#There are many studies showing specific valuation tools can work — if we define “working” as delivering market-beating results over a long-enough time horizon. In other words, value… Read More
Many investors think in binary terms. Often times, that means when looking at a particular stock, they tend to distinguish between whether it is a “value” or “growth” stock. Value investors like to focus on companies with low valuations — whether based on the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio or something similar. Growth investors, on the other hand, focus on things like earnings growth, expecting share price to follow profits higher. #-ad_banner-#There are many studies showing specific valuation tools can work — if we define “working” as delivering market-beating results over a long-enough time horizon. In other words, value investing often means you have to be patient through years of underperformance — a time horizon many growth investors don’t share. But growth investing has its own caveats. For instance, a stock’s price can fall as quickly as it rose if a company’s growth slows or if a competitor bursts onto the scene. Despite the seemingly stark contrast between value and growth investing, I tend to blur the lines between the two disciplines. For instance, I often use the PEG ratio, which combines a company’s P/E ratio and its earnings per share (EPS) growth rate. The PEG ratio recognizes that… Read More