Value or Growth Stock

No, they are not penny stocks. Stay away from penny stocks unless you really know what you are doing (ie, if you have to ask this question, you are not a candidate for penny stocks).

They can pay dividends, but most likely, they reinvest for growth.

The difference is that a value stock is normally a company that once did well, but is beaten down for some reason. The theory is that there is more value in the company than what the stock price shows. If you get in cheap, and the company turns around, you can do very well.

A growth stock is a company that is still in the process of making it big the first time.

A value stock is one with a track record over time, but the recent record is either not so good, or shows a turn-around. A growth stock doesn't have a long term track record, but the recent record is good. In fact, it is often so good that the stock gets hyped and is selling at a higher price than what its numbers might suggest is reasonable.

-john-

Hi John

You wrote the first explanation that makes sense to me.

Have a good New Year, John

"John A. Weeks III" wrote

For the OP in particular: I do not consider "growth" to be this black-and-white. Some very old companies may in fact be considered growth ones. Harley-Davidson (HOG) company is over 100 years old, but it is listed as a "large growth" stock at morningstar.com.

Realize that, while companies like

will label a company "value" or "growth" or "core," these terms are subjective. Also, a company may be said to move back and forth between the categories.

Morningstar noted in a February, 2006 article: "Some people think a growth company is any business with earnings growth of at least 15%; others argue that it's a company growing faster than its industry. It seems some folks even equate growth stocks just with the technology industry. At Morningstar, our definition is simple: It's any business with wonderful investment opportunities--opportunities for investing capital at high rates of return."

At the following March 2006 Morningstar link, the author even points out that it's not worth making a distinction between value and growth:

7493&_QSBPA=Y For more perspective, go to 's dictionary, and type in "value stock" and then "growth stock," and consider its definitions. Try the same via googling.

"Value stocks" are stocks that are "on sale", or priced attractively compared to the book value of the company's assets or current earnings. Sometimes this happens when the company is facing legal trouble or business setbacks, or just when investors are all off chasing some other market sector. You might buy a value stock if you think these are temporary factors and the company is going to continue to churn out earnings.

"Growth stocks" are stocks that are "expensive" compared to current assets or earnings, but where invetors think the company's business or market segment has the potential to grow rapidly. A lot of technology companies fall into this category, for instance. You might buy a growth stock if you think the company is going to make a lot of money in the future, even if they're not making a lot of money now.

-Sandra

John, "Who's asking?" There are all kinds of subjective definitions out there.

In finance theory, the most common definition is based on a ratio: the book value divided by the market value of a stock ("BtM", book to market). This is the definition Eugene Fama & Kenneth French used to sort stocks, in their research that determined that value stocks had outperformed growth stocks over most of the history of the US stock market, as well as several foreign markets. Google FAMA FRENCH VALUE for info on that.

But even that has subjective components. Like, where to draw the line? E.g. do you divide stocks into one or the other, as some value/growth indices do, or do you select a percentage that have the highest BtM? Do you define it by number of stocks (10% of the Russell 3000 = 300 stocks) or do you define it by market cap (10% of the Russell 3000's market cap, whatever # of stocks that is). Also, it's common to adjust book value in the calculation, to reduce the impact of accounting standards in setting "book value" of a stock, so that affects the sorting as well.

Next most common method is based on price-to-earnings ratio, with low-P/E stocks being called value and high-P/E stocks called growth (those in the middle ground might be labeled "core" or "neutral" or some similar term). This also has many subjective aspects to it - such as adjustments to earnings based on accounting standards, and looking at trailing vs. predicted earnings when sorting stocks by P/E.

Dividend yield used to be used more as a sorting criteria, but that's less common because dividend doesn't signal much in US stocks anymore. It might be more useful with German stocks where, IIRC, dividend policies are more tied to earnings because of securities laws there. But I can't recall a recent study of growth vs. value that used dividend yield. There have been some that combine these three factors (BtM, P/E, and yield), and I think some of the newer stock indices are constructed this way.

-Tad

I agree with Tad that there is no bright line separating "growth" and "value" stocks -- there is a continuum. The same can be said for small cap vs. large cap stocks, although at least here the criterion (market capitalization) is clear-cut.

Therefore IMO value stocks and growth stocks do not represent separate "asset classes", as they are often termed, nor do small cap stocks and large cap stocks. I don't believe in asset allocation models that prescribe a static mix of x% in large growth stocks, y% in small value stocks, etc. What makes more sense to me is one of the following (1) buying a total stock market index fund -- if one does not believe in the value of small cap effects -- and there are some academics who still do not. (2) buying an actively-managed all-cap blend fund where the portfolio manager has the freedom to target the segment of the stock market he finds most attractive (3) dynamically changing the weights allocated to small and large cap stocks or growth vs. value stocks based on a measure of their attractiveness. I think I have seen a study showing that the difference in earnings yield between large cap and small cap stocks predicts future differences in returns. A paper on timing value vs. growth, which can be obtained by emailing the authors through their site, is cited at the end of this message.

The same argument applies, with less weight, to domestic vs. foreign stocks. It's not clear to me that they are distinct asset classes.

By contrast, stocks and bonds represent distinct asset classes IMO. For one thing, their correlation to each other is lower than the correlation of small cap to large cap stocks, and the correlation can even be negative.

Cliff, Jacques Friedman, Robert Krail and John Liew, 2000,"Style Timing: Value vs. Growth", Journal of Portfolio Management,Spring. Style Timing: Value versus Growth Is Value Dead? Summary A large body of both academic and industry research supports the long-term efficacy of value strategies for choosing individual stocks. However, value strategies are far from riskless. They can have long periods of poor performance. In an effort to improve upon these strategies, researchers have tried to forecast these returns with mixed results. Most of these "style timing" models are based on macroeconomic factors. We take a different approach considering two simple factors: (1) the spread in valuation multiples between a value portfolio and a growth portfolio (the value spread) and (2) the spread in expected earnings growth between a growth portfolio and a value portfolio (the earnings growth spread). We find that the bigger the value spread and the smaller the earnings growth spread, the better our forecast for value versus growth going forward. These results are statistically and economically strong. Finally, our current (November

1999) predicted one-year return of value versus growth is near the highest in history.

Hi Tad, Tad Borek schrieb:

I livehere in Germany and DAX is what I used as a Benchmark.

wishing you a Happy New Year, John

I understand that now.

as they are often termed, nor do small cap stocks and

I do compare it it with small cap stocks and large cap stocks though.

which supports efficient market hypothesis (EMH)

which contradicts efficient market hypothesis (EMH)

wishing you a Happy New Year, John

The EMH is NOT inconsistent with some types of investment yielding a higher return than other types. Stocks yield a higher return than bonds over the long-run, yet this is perfectly consistent with the EMH. What the EMH says is that, if you select investments with a higher return

-i.e., small cap value stocks- then, in an equilibrium, these investments will also face higher risks.

I meant to write "value OR small cap effects" above.

Jose Bailen schrieb:

but the EMH pushes more for an passively-managed market (like index funds) Is that not true?

CU John

Index funds are not inconsistent with EMH/getting a better return than the market average. It all depends on how you design the index. You may design a micro cap or small cap value indexed fund with higher return than the market average, even for these categories of assets. Of course, the drawback is that, in equilibrium, you have to accept higher volatility of the returns, i.e., higher risk.

Jose Bailen schrieb:

I also dont think index funds are a guarantee for beter returns, rather more for protection (and the TER is much lower than normal funds)

Happy New Year, John

I agree that index funds are not a guarantee of better returns, but neither are conventional, actively managed funds. At least, index funds have the advantage of their relatively low management fees, and because they usually have a lower asset turnover, they are more tax efficient.