Is it better to invest in growth or value stocks?
Some studies show that value investing has outperformed growth over extended periods of time on a value-adjusted basis. Value investors argue that a short-term focus can often push stock prices to low levels, which creates great buying opportunities for value investors.
When investors invest in growth stocks, they have an eye toward huge future capital gains. Unlike value stocks, which many investors choose because of strong fundamentals, growth stocks are often selected because of the stock's strong potential for growth, even if its current earnings are low.
We find reliable evidence that value stocks are riskier than growth stocks in bad times when the expected market risk premium is high, and to a lesser extent, growth stocks are riskier than value stocks in good times when the expected market risk premium is low.
The intrigue deepens when we consider the anticipated decline in interest rates for 2024. According to conventional wisdom, this should herald another favorable year for growth stocks relative to value. Yet, the lessons from 2023 remind us that markets are unpredictable, and historical patterns may not always hold.
If you need a regular stream of income, you should focus your portfolio on funds that will help you achieve this. If you have a longer investment time period, or you do not need an immediate income, you should think about a larger allocation to growth-focused funds.
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.
Additionally, value funds don't emphasize growth above all, so even if the stock doesn't appreciate, investors typically benefit from dividend payments. Value stocks have more limited upside potential and, therefore, can be safer investments than growth stocks.
Value dominance tends to assert itself when inflation is high, economic growth is strong and rates are elevated. By contrast, Growth stocks often outperform when inflation is low, economic growth is relatively weak and rates are low and falling. There are two main reasons why inflation appears to favor Value stocks.
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.
Key Takeaways. Safe assets are those that allow investors to preserve capital without a high risk of potential losses. Such assets include treasuries, CDs, money market funds, and annuities.
What stocks will outperform in 2024?
| Stock | Expected Change in Stock Price* |
|---|---|
| Tesla Inc. (TSLA) | 61% |
| Mastercard Inc. (MA) | 14.2% |
| Salesforce Inc. (CRM) | 7.2% |
| Advanced Micro Devices Inc. (AMD) | 11.3% |
We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.
After a year of Big Tech mania, is it finally time for value stocks to shine? These portfolio stalwarts have mostly lagged their counterparts in the growth category and the broader market for years. However, strategists say the right conditions could lead to a breakout for the under-loved category in 2024.
Companies that have growth-oriented stocks typically have higher earnings growth, cleaner balance sheets, and better profitability—all traits that often help them hold up better than companies with cheaper stock prices during recessionary periods. But growth stocks haven't fared well during every recessionary period.
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.
| Name | Price | Analyst Price Target |
|---|---|---|
| GM General Motors | $44.00 | $50.16 (14.00% Upside) |
| IBM International Business Machines | $188.50 | $191.69 (1.69% Upside) |
| PFE Pfizer | $27.59 | $31.44 (13.95% Upside) |
| ABBV AbbVie | $179.19 | $180.80 (0.90% Upside) |
- Pfizer PFE.
- Polaris PII.
- Campbell Soup CPB.
- Comcast CMCSA.
- Gilead Sciences GILD.
- Medtronic MDT.
- RTX RTX.
- U.S. Bancorp USB.
| Stock | Forward price-to-earnings ratio (P/E) |
|---|---|
| Enphase Energy Inc. (ENPH) | 25.3 |
| Microsoft Corp. (MSFT) | 30.0 |
| Nvidia Corp. (NVDA) | 26.6 |
| Tesla Inc. (TSLA) | 57.6 |
Growth stocks carry relatively lesser risk because their growth rate is high and increasing. They are relatively less sensitive to adverse economic conditions than the overall market. Hence, growth stocks are relatively less risky investments. Value stocks come with lower metric ratios because they are undervalued.
The Cons of Value Investing
Only investing in value stocks means that you may miss out on some gains. It can be challenging to find truly undervalued stocks. There can be thoughts out there about what a stock is worth, and it can be relatively difficult to determine which stocks are undervalued.
What are the cons of value investing?
- Value investment is complex. Any error and one may catch hold of a 'value' trap, which does have lower valuations, but no potential for growth.
- Value investment requires patience. The waiting period could be in years. ...
- Value investment may not give you enough diversification.
Value Investing Is Long-Term Investing
This is why Buffett recommends only purchasing stocks that you're willing to hold for 10 years. Taking on that attitude forces us to stop caring so much about the short term, and refocuses our efforts on predicting what will come after.
As far as Nifty is concerned, it has traded in a PE range of 10 to 30 historically. Average PE of Nifty in the last 20 years was around 20.* So PEs below 20 may provide good investment opportunities; lower the PE below 20, more attractive the investment potential.
All it takes to make money with a value stock is for enough other investors to realize there's a mismatch between the stock's current price and what it's actually worth. Once that happens, the share price should go up to reflect the higher intrinsic value. Then those who bought in at a discount will get their profit.
While growth stocks handily outperformed value from 2015 through 2021, 2022 was a different story. Growth stocks, represented by iShares S&P 500 Growth ETF (IVW), sank 30% in 2022.
