Growth Stocks vs Value Stocks (2024)

FAQs

Growth Stocks vs Value Stocks? ›

Key Takeaways

Finally, when it comes to overall long-term performance, there's no clear-cut winner between growth and value stocks. When economic conditions are good, growth stocks on average modestly outperform value stocks. During more difficult economic times, value stocks tend to hold up better.

Buffett is often called a value investor. In fact, he studied economics at Columbia University under the legendary Benjamin Graham, a man often called "the father of value investing." Buffett himself leaned into that mindset early in his career, believing value stocks to be superior to growth stocks.

Value stocks are expected to gain value eventually when the market corrects their prices. In the unlikely event that the stock doesn't appreciate in value as was expected, investors can lose their money. Hence, value stocks are relatively riskier investments.

Unlike growth stocks, which typically do not pay dividends, value stocks often have higher than average dividend yields. Value stocks also tend to have strong fundamentals with comparably low price-to-book (P/B) ratios and low P/E values—the opposite of growth stocks.

The S&P 500 market capitalization is divided roughly equally into growth and value. One of the quirks of the indexes is that it's rare when a stock is 100% classified as just a growth or value stock.

Value investing, however, has increasing difficulties in the current financial scene, notwithstanding its historical success and popular support by financial celebrities. The fast speed of technical developments and changing market dynamics call into doubt the efficacy of the strategy in its current surroundings.

Do value stocks do better in a recession? ›

A common perception is that value stocks are more cyclical and therefore more vulnerable to economic downturn. We find that this conventional wisdom is false: empirical evidence shows that value stocks actually tend to outperform in recessions.

For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.

For the most part, technology companies and growth stocks typically do not take the cash they generate and send it back to investors through dividends. Instead, that cash is reinvested in the business to fuel additional growth or returned to investors through share buybacks.

Growth Versus Value

Growth stocks have outperformed value issues by a wide margin over the trailing 10-, 15-, and 20-year periods. Value stocks held up much better than growth stocks during the 2022 bear market, but not enough to offset their lagging returns in previous periods.

Investors often face a choice between Dividend Growth stocks and High Yield stocks when seeking income-generating investments. While High Yield stocks offer attractive immediate returns, Dividend Growth stocks provide superior long-term benefits, including income growth, capital appreciation, and lower volatility.

GROWTH IS USUALLY THE MAIN POINT of an investing strategy. But, depending on your goals, income-producing investments may be equally if not more important.

Companies that show up on growth indexes actually don't grow appreciably faster than those that show up on value indexes. What does distinguish companies on growth indexes from those on value indexes is return on invested capital.