Saturday, April 30, 2016

Pros And Cons of Growth Versus Value Investing


Courtesy :www.motifinvesting.com
 
How well do you know the differences between growth and value investing? Want to determine if one of these strategies is suitable for your investment goals? Let’s explore the principles of value and growth investing as well as the pros and cons of each of these renowned and debated investment strategies.

THE FUNDAMENTALS OF VALUE INVESTING

Studies have shown that value investing has done better over time compared to growth investing.But it should come as no surprise that exceptions can occur and under-valued companies aren’t always winners.
What’s the fundamental concept of value investing? The framework was formed in the 1930s by two finance professors at Columbia University, Benjamin Graham and David Dodd.
The basic idea is for investors to identify and purchase companies that the markets have undervalued. If and when the markets adjust upwards to the true valuation of those companies, value investors can earn profits on those price increases.

Cheap Prices Don’t Necessarily Indicate Good Value

Keep in mind, value investing isn’t about buying every stock that has fallen or is priced low. After all, low share prices can be due to legitimate reasons such as underlying issues with a company’s financial health and prices may remain low if solutions aren’t put in place.
Value investors look for companies with strong fundamentals that the market hasn’t fully reflected in the price. They analyze a company’s intrinsic value by looking at various aspects such as its cash flow, earnings, book value, and business model, looking for clues that the current stock price is undervaluing its full worth. A few guidelines that some value investors utilize to select investments include:
• D / E ratio < 1
• PEG ratio < 1
• Market Cap < Book Value
• Cash > Market Cap
• Current assets at least two times current liabilities
Now let’s take a look at some of the pros and cons of value investing.

Pros of Value Investing

• Value investors can take advantage of devalued assets when others are panicking.
• The hype and herd mentality do not have much of an effect on a value strategy.
• Day-to-day price fluctuations and market volatility are not much of a concern to value investors because they are focused on the value of a business instead of external factors.
• Value investors can experience steady and consistent gains that may outperform benchmarks such as the S&P 500.

Cons of Value Investing

• Value investors may lose out on larger returns due to searching for companies with a margin of safety.
• The under performance of a company’s share price could last for years or may never rise to the investor’s estimate of fair value.
• There may be a lack of liquidity due to the stock’s under performance or low market cap.
• It can be difficult to determine if a stock has bottomed out or could continue falling further down.
• Finding investments can require a lot of time spent on research and analysis.

THE BUILDING BLOCKS OF GROWTH INVESTING

Thomas Rowe Price, the founder of T. Rowe Price Associates, has been dubbed by many as “the father of growth investing.” Price’s growth philosophy was based on investing in companies that he believed would grow faster than the economy and inflation.
Some of the aspects Price looked for included well-paid employees coupled with low labor costs, limited competition, protection from government regulation, earnings per share growth, consistent high profit margins, and a minimum 10% return on invested capital.

Diamonds In The Rough

Growth investing is typically focused on a company’s potential down the road, and not so much on its current share price. Growth stocks also tend to be younger companies that reinvest their earnings into the company instead of paying dividends and are identified as growing significantly faster than their competition (aka Growth At A Responsible Price). They may also be a part of industries such as technology that are experiencing fast expansion.
Examples of guidelines that some growth investors follow when selecting investments include:
• Historic earnings growth. For example, a minimum of 7% earnings per share (EPS) growth for companies between $400M – $4B.
• Companies with an expected 10-12% earnings growth rate over the next five years.
• Industry leaders that have beat pre-tax profit margins for five years.
• Steady or rising ROE.
• Expectations that the stock price can double in five years.
Here are some noteworthy pros and cons of growth investing investors should consider:

Pros of Growth Investing

• Successful investments may appreciate much faster than the overall market by the very definition of growth investing.
• Investment selection is focused on attractive companies with above average earnings and sales growth.
• Investors can gain exposure to cutting edge industries that are rapidly evolving and are exciting to watch.

Cons of Growth Investing

• Higher risk and volatility.
• Dividends are uncommon as most growth companies reinvest their earnings.
• Time intensive to evaluate the credibility of various growth projection estimates.
• Valuations could be much higher than the market average to reflect projected growth that may never materialize.

Two Sides Of The Same Coin

If you don’t find yourself strongly preferring value investing to growth or vice versa, the good news is you don’t have to choose one over the other. Some investors choose to diversify and apply both methods to their portfolio’s stock selection.
Warren Buffet is known for not associating with one specific strategy and stated in his 1992 Chairman’s letter, “…the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid?".

96 comments :

  1. Sir do you track Jbm auto a auto ancillary player trading at half times industry p/e and which has entered in to premium bus segments. it has also showcased India's first fully electric bus in auto expro 2016 targeted at smart cities and city transportation system. its first lot of 105 buses will be delivered very soon to NMRC.

    ReplyDelete
    Replies
    1. Not strictly tracking JBM Auto . In recent past it seems lot of companies utilising the theme' Smart City' as a way to boost their stock price . One need to wait and see the viability of such companies related with smart cities and their ability to grab orders for the same.

      Delete
  2. Sir

    I want to invest in SKM Egg what is your opinion ?.In messageboard many expert boarders are saying SKM is now at throw away price . Can I enter at this rate.Please reply.



    ReplyDelete
    Replies
    1. Already suggested my personal opinion on SKM - Stay away for the time at this price being and re-look once there is sign of improvement in business situation.

      Delete
  3. Dear sir, Satin credit care is falling continuosuly even after giving good results, as i am convinced with its fundamentals, i am little bit weak in guessing the pricing, do you think it is currently overvalued sir... if u find time please reply sir.

    ReplyDelete
    Replies
    1. Scarcity premium may come down when more and more companies available from the particular industry.

      Delete
  4. Sir, thanks for your guidance and your articles are very useful to us.
    Sir please share your view about KAKATIA CEMENT

    ReplyDelete
    Replies
    1. Stock price rallied a lot in past few weeks.

      Delete
  5. Dear VP ji, with a diversified businesses such as cinemas, retail, jewel, fashion SRS limited growing. with a top line around 4000 cr. It is trading at Rs.14. Market cap of 800 cr. I don't know much further. Please tell your view. Also your opinion about shalimar paints. Thk u

    ReplyDelete
    Replies
    1. Not expecting any premium valuation for a business whose NP margin is as low as 1 %

      Not Tracking Shalimar Paint.

      Delete
  6. Thank you sir for your replay about KAKATIA
    please share your about KSE Limited
    sorry if I am disturbing you with my second question

    ReplyDelete
    Replies
    1. Issue of KSE is inconsistency in performance and sharp fluctuation in margins quarter over quarter.

      Delete
  7. Sir,

    You view on ESSEL Propack post results and SKIPPER ltd.

    ReplyDelete
    Replies
    1. Essel Propack is currently trading around Rs.180 which is an appreciation of 50 % from suggested level. Prefer to take part profit and hold free of cost shares.

      Not tracking Skipper.

      Delete
  8. Dear VP sir,
    Very useful article. Thanks
    Regards,
    U.Sundar

    ReplyDelete
  9. Dear Sir,
    Your valuable comments after essel propack result.
    Thanks.

    ReplyDelete
  10. Hi VP Sir, It's very nice to see you very active these days than you were before 5-6 months back. We see lot of posts replied by u quickly. Thanks for spending your valuable time for new and small investors like us. Thank you Sir.

    ReplyDelete
  11. Sir your opinion on Cineline India Ltd and are you following any Pharma stocks recently?Please answer this query if you have time.I have posted to you of Pharma stocks recently also in your last articles you never answer please at least answer this time.

    ReplyDelete
    Replies
    1. Not tracking Cineline India

      Due to uncertainties on account of aggressive USFDA actions ,I am not expecting out performance from paharma sector in coming years except for some potential turn around cases which we discussed in the past.As a sector Pharma may be a market performer and steady compounder and not an out performer like past few years.

      Delete
  12. Dear Sir, is there update on Multibase india and sunshield Tks

    ReplyDelete
    Replies
    1. Nothing to update for the time being and prefer to HOLD.

      Delete
  13. Dear sir, thanks for the articles and kind the kind replies. Willing to know your views on Andrew yule, And Arman fin services. Thanks in advance

    ReplyDelete
    Replies
    1. Not tracking Andrew Yule .
      Arman finance is an already suggested stock @ Rs.21 which touched a high of Rs,240 and currently trading around Rs.145 , no new suggestion for that.

      Delete
  14. Sir please your view upon Astra microwave result is it buy or else

    ReplyDelete
    Replies
    1. Astra Micro already suggested as a bu @ Rs.35.

      http://value-picks.blogspot.in/2013/06/astra-microwave-products-ltd-niche.html

      At CMP Rs.125 , average risk takers cab HOLD.

      Delete
  15. VP sir nice to see you in form.sir your view on syngene international,poddar pigments. And snowman logestic.

    ReplyDelete
    Replies
    1. Recently expressed my view on Poddar , not tracking others.

      Delete
  16. Sir,

    Your views on Atul Ltd.

    Regards,
    Manish

    ReplyDelete
  17. Dear VP, what is your take on Dynemic Products?

    ReplyDelete
  18. Sir, your views on indiabulls ventute?

    ReplyDelete
  19. Dear VP,

    How do you look at steel industry. Any view on Usha Martin ?

    Also, request you to share some turn-around companies that you are tracking closely.

    ReplyDelete
    Replies
    1. Metal industry following global cycle and it may be a 'U' shaped recovery .

      Delete
  20. Sir what to do with Ujaas energy.I am already invested at 27.50. Vikas Kumar Tomer

    ReplyDelete
  21. Sir, one Q - are SML & Isuzu operating under one business listed compay SML Isuzu? or both are separated?
    Bcoz recently Isuzu launched one car without SML...so asking?

    ReplyDelete
    Replies
    1. If my understanding is correct only the truck and bus business coming under the listed entity and others through direct subsidiary of parent.

      Delete
  22. Dear Sir, is there any update on subex , can i add more at this price ,
    thank you .

    ReplyDelete
    Replies
    1. Many times discussed about Subex recently , pls refer earlier comments.

      Delete
  23. Thank you sir for sharing knowledge and guidance. What will be your opinion about khaitan electric, genus power, VIP industries

    ReplyDelete
    Replies
    1. Genus power already suggested around Rs.21 ( adjusted to stock split) , as of now not tracking it.

      Delete
  24. Sir What is your view on Adi Fine Chem..are you tracking it?

    ReplyDelete
  25. Replies
    1. GRP ( formerly Gujarat Reclaim & Rubber) is an already suggested stock @ Rs.730

      Delete
  26. Dear VP ji pls give your present view about your old recommend Ion exchange
    And also about triton valves. Thank you sir.

    ReplyDelete
    Replies
    1. Hold ION Exchange

      Not tracking Triton .

      Delete
  27. Dear VP,

    Recently came across a company Bluechip Tex Industry, which is involved in manufacturing of dyed yarn.

    Company sales has been growing for 5yrs at CAGR 63% and ROE at 16%. Healthy dividend payout. But low operating margins.

    No red flags again management.

    Please share your view.

    ReplyDelete
    Replies
    1. In the textile space I am interested only in branded plays especially at a time there is lot of challenges from countries like Vietnam in export front and increasing cotton prices.

      Delete
  28. Dear Sir,

    What is your suggestion on TRYGEN TECHNOLOGY ?

    ReplyDelete
    Replies
    1. I could not understand their business models , hence no comments.

      Delete
  29. Siddharth BhaskarMay 4, 2016 at 10:05 AM

    Hi Sir,

    Your latest on IL&FS engineering? Been holding it since you first recommendation at around 90.

    Also are there any pharma stocks that your tracking that are attractive at CMP?

    Awaiting your response.

    ReplyDelete
    Replies
    1. Please read the comment portion of the last posting on IL&FS Engineering ( available in below link) where I suggested to shift from IL&FS Engg for the time being.

      http://value-picks.blogspot.in/2015/11/result-update-il-engineering.html

      Delete
    2. Dear VP Sir, In the link we could not see your suggestion to shift from IL&FS Engg.

      Delete
  30. Hello VP Sir,
    What are your views on the below stocks -

    Force Motors Ltd
    PTC India Financial Services (PFS)
    Bharat Electronics
    Mahindra Lifespace Developers
    Indian Terrain Fashions

    Thanks,
    Ramesh

    ReplyDelete
    Replies
    1. Mahindra Lifespace is the only company I am tracking out of it . Company is not bad but sector re-rating is the key for further appreciation.

      Delete
  31. sir how do you think orchid pharma can pay such a huge debt to come to old fortune ,please throw some light on it

    ReplyDelete
    Replies
    1. As per company announcement ,They are in the process of availing low cost loans.

      Delete
  32. Hi sir....I am from medical background and an amateur in stock market...I want to learn about d same like how to read financial reports , analysing d ratios ...etc....ie right from d start.....so could you plz suggest any books or sites that will be helpful. Thanks....

    ReplyDelete
    Replies
    1. Already suggested few books , pls check the archive.

      Delete
  33. Hi VP,
    Please let us know your comments on Energy Dev, Royal Orchid , Allsec tech & Ashok alco-chem. Also please let us know how do you do your asset allocation & Any strategies you employ during bear market?. Thanks

    ReplyDelete
    Replies
    1. Tracking only two- Allsec and Ashok alco chem . Slightly positive on Allsec as a company .From an investment point of view ,correction will offer margin of safety.

      Ashok Alco is a commodity type business and entry and exit timing is important.

      Delete
  34. Hi VP Sir, What's your valuable views about Welspun Enterprises. Almost debt free in infrastructure sector. Which are the stocks you are tracking in infra sector other than Ramky Infra.

    ReplyDelete
  35. What is view on Western India shipyard for investment purposes.

    ReplyDelete
  36. Sir,

    I am having the conviction with mic and pioneer, but falling price making me worry. Please advise what to do. Can hold the stock for 1-2 year..

    ReplyDelete
    Replies
    1. Not sure what you mean by 'Conviction' .Nothing to advice for time bounded investment in stocks.

      Delete
  37. Sir

    Are you tracking 21st century management. Looks like a good company for long term..your thoughts please.

    ReplyDelete
    Replies
    1. Not tracking any investment companies.

      Delete
  38. Sir, Please share your view on Parag Milk foods IPO

    ReplyDelete
    Replies
    1. Not a bad company , but IPO pricing is aggressive.

      Delete
  39. Sir please suggest ur view on Nectar lifesciences..

    ReplyDelete
  40. Wt ur views on castex technology?

    ReplyDelete
  41. Do you think switch from Il&fs engineering to Ramkey is a good option?

    ReplyDelete
    Replies
    1. A possible option from the same sector

      Delete
  42. Happy to see you again as you were dear VP sir

    ReplyDelete
  43. Sir, Kindly please share your views on Lotus eye care hospital

    ReplyDelete
    Replies
    1. No idea about promoters ability to scale up business.

      Delete
  44. Sir,
    Please share Your view on IVP LTD

    Thanks,
    Anand

    ReplyDelete
  45. VP Sir,

    Your take on Modi Naturals. Offlate the stock is correcting and wanted to know if one can buy or sip in to it?

    Thanks for being active and god bless you sir.

    ReplyDelete
    Replies
    1. It is an already suggested one @ Rs.14

      I don't think small and micro caps are suitable for SIP type investment, entry and exit timing is important .If you are a passive investor and planning an SIP ,better to look into proven bluechips.

      Delete
  46. Dear VP sir

    Any views on precision electronics? Do you think the defense story will play out for this company? Thanks

    ReplyDelete
    Replies
    1. Potential is there ,promoters ability to convert it into business is important.

      Delete
  47. Sir why you are positive on Allsec Technology .It was in loss last year and in 9 months of this year its EPS is only Rs.5.50 .P/E is 26 is in't too high.

    ReplyDelete
  48. I don't think investment decisions based on past is the right strategy. What will happen in future is more important as far as return from investment is concerned. Your data about current nine month EPS is not correct . Look at its consolidated figures where it already posted an EPS of Rs.13.30

    ReplyDelete
  49. SIR MAY I KNOW YOUR VIEW FOR MEDIUM TERM ON ROTO PUMP.

    ReplyDelete
  50. Sir,Feeling happy that u r back on stage.

    ReplyDelete
  51. Hello VP Sir,
    Could you please give your views on Career Point.
    I invested in career point 1.5 years ago, thinking its turning around and there were some articles which mentioned that it would get back to there peak level of students within 2 years, since exam format has changed back to old one.
    But every quarter there is some wipe off of the non performing division, last quarter they closed some loss making divisions, this quarter automobile venture.
    They have opened schools, university and also kids play school recently.
    Venturing into NSDC program is recent move and some rajasthan govt training programs. 6 months ago they also planned to open financing for educations.
    Financing is not there expertise but others are related ones.

    ReplyDelete
  52. Comment on zicom hitting 52 week low. Attractive buy now?

    ReplyDelete

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