Stock investors typically classify themselves into one of two categories: value or growth investors. Each of these camps has distinct preferences and philosophies when it comes to picking stocks.
The former hunt for undervalued companies, often in stodgy industries like industrials or consumer staples. Their goal is to find a stock priced unfairly by the market and trading lower than its intrinsic value. To that end, they often rely on metrics such as price-to-book, price-to-earnings and dividend yield ratios to identify potential bargains.
In contrast, growth investors focus on companies projected to grow at an above-average rate, predominantly in more attention-grabbing areas like the technology and consumer discretionary sectors. Key indicators for them include earnings growth rate, return on equity and revenue growth.
“While earnings may remain positive, the risk associated with growth stocks is overpaying for future growth,” says Adam Grossman, global equity chief investment officer at RiverFront Investment Group. “This contrasts with value stocks, where the primary risk is stepping into a distressed situation that does not improve.”
Although growth investing has performed well over the past decade, it doesn’t guarantee success for every growth stock picker. The practical challenges of managing a growth stock portfolio are many: continuous rebalancing, commissions on trades and the task of tracking quarterly earnings for multiple companies. All of these can eat into an…
