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An Analysis Of Value And Growth Investing

1090 words - 5 pages

An Analysis of Value and Growth Investing

Saint Leo University

An Analysis of Value and Growth Investing
This essay will define and identify the differences between value stocks and growth stocks. It will also explain the rationale that investors use for purchasing both value and growth stocks, and will identify whether value or growth investing has worked best over the long term. In addition this essay will provide incite as to which of the two investment methods I prefer and a justification for this preference and lastly will identify a recent example of someone who can be described as a value or growth investor and describe their successfulness with the method they chose.
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For example, Bruce Berkowitz, the CEO of Fairholme Capital Management reasons that “he aims to buy cheaply to obtain a margin of safety and buy time for perceptions of a beaten-down stock to improve” (Segal, 2014). On the opposite side of the investment stock coin are growth stocks. Investors choose to purchase growth stocks because the companies usually are successful already and they hope to take the higher priced stocks and sell them later for higher prices in the future. The risk in this case is that there is never any guarantee that a company that is successful in the present will be successful in the future. However, many growth investors might argue that it is easier to track the performance of some of these big-name companies’ growth stock and thus evaluate how they are likely to do in the future. For example, Kroger is a growth stock which was at one time considered unlikely. However, “the operator of grocery stores has redesigned its stores and is offering more organic and natural foods, keeping pace with changing customer tastes and with competitors like Whole Foods Market” (Hoover, 2015). In addition, “its Earnings Stability Factor is 5 on a 0 to 99 scale, where low numbers correspond to steady growth” (Hoover, 2015). These type of measurable factors can help a growth investor determine if the eventual higher returns are worth the initial high prices of the stocks.
Value or Growth Investing – Which is Best Long Term?
It is actually very difficult to gauge which form of investing has performed best over the long term because when you look at performance over many years, you see long periods where value investing has done very well, but also short periods in between where growth investing has taken the lead. If an analyst utilizes the Russell 100 Growth Index and also the Russell 1000 Value Index it appears that “the value investor tends to muddle through bad times with fewer wounds than the growth investor, who lags in down periods” (Bresiger, 2014). David Koenig, an investment strategist for the Russell Indexes, states that “You do see a value premium; where value has outperformed growth over the very long term; but there are certainly periods when growth significantly outperforms value as...

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