Growth vs Value Investing

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Growth vs. Value Investing

by BDO Securities | Oct 01, 2023 | 5 min. read

When it comes to buy-and-hold investing, there are two main categories or approaches to finding stocks to buy. Some investors use a growth investment approach, while other investors prefer a value investing approach.

Both growth and value investing rely on fundamental analysis of companies. While you may not be doing your own fundamental analysis, knowing the differences between growth and value investing can help you better understand how to invest in the Philippine Stock Exchange.

Below is a brief explanation of growth stocks and value stocks in the Philippines.

Growth Investing

Growth investing in the Philippines involves buying companies experiencing momentum. This can be seen in many growth stocks via aggressively expanding operations and reinvesting all profits back into the company. Many times, these companies are trying to dominate competitors and move aggressively to do so.

It’s very common to find growth stocks that don’t pay dividends. This is because companies that are aggressively expanding operations are not retaining money to pay to stockholders via dividends. Growth companies use profits to reinvest in the expansion of the company instead of paying dividends.

Growth stocks can also hold more risk since they often sell for many times their earnings. Investors pay more for growth stocks (in terms of earnings) since they believe the stocks will continue their momentum. When growth stocks are successful and can continue their momentum, an investor can make healthy profits.

There are different indicators an investor can use to decipher if a stock is a growth stock. Below are just a handful of indicators that may help determine if a stock is considered a growth stock.

Growth indicators

Earnings per share (EPS) growth

Earnings are profits of a company and earnings per share is a metric used to compare company profits. When there is healthy growth in the earnings per share of a company, it can be an indicator that the company is a growth stock.

Profit growth

Profit growth is very similar to earnings per share growth. If the overall profit of a company is growing it can be an indicator the stock is a growth stock.

Branch expansion

Since growth stocks are often aggressively expanding operations, many growth companies will have an expansion in their number of branches. If a company is seen expanding their branch operations, it may be an indicator the company is a growth stock.

Value Investing

While growth investing involves companies favored by the market to continue expanding and growing, value investing is the opposite. Value stocks in the Philippines are often out of favor companies. These stocks can be viewed as out of favor for any number of reasons.

For example, the market may believe the growth potential of a stock is weak. So, if a value investor thinks the market is overacting about the growth potential of a stock, they may see it as a market inefficiency and buy the stock. Another reason a stock can be considered a value stock is due to negative news or press coverage.

For example, perhaps a company CEO is involved in a scandal, or the company is being sued. If one of these scenarios were to happen, the market may sell the stock and drive the price down. A value investor may see this news as a potential opportunity to buy the stock at a discount.

Just like growth stocks, value stocks have the potential to earn money. When value investors are right about undervalued stocks and they appreciate, investors can make nice returns. Unlike growth stocks, value stocks are often more established companies, so they are more likely to pay dividends. There are different metrics investors use when searching for value stocks - below are a select few metrics that may be used.

Value indicators

Discount to net asset value (NAV)

The net asset value of a company can be calculated by subtracting a company’s assets from its liabilities. When a company’s stock is trading for less than the net asset value (NAV) it’s considered to be trading at a discount to NAV. This can be a potential indicator of a value stock.

Price to earnings ratio

A price to earnings ratio (PE ratio) is the price a stock is selling for divided by its earnings per share. A low price to earnings ratio compared to other competitors in the industry can be a potential indicator of a value stock.

Price to book value

The price to book value of a company uses the book value (net worth) per share of a company and divides it by the price the stock is selling for. Like the PE ratio, a low price to book value compared to competitors can signify a potential value stock.

Conclusion

Both growth and value investing can be profitable ways to approach stocks on the Philippine Stock Exchange. As a BDO Securities customer, it’s not necessary to do your own fundamental research to find stocks to buy. BDO Securities offers many high-quality reports to help you find stocks, and some of these reports distinguish if stocks lean toward growth or value.

While it’s not necessary to do your own research, it helps to understand the difference between growth and value stocks. Growth stocks are often expanding aggressively, and the market sees them as continuing their momentum. Value stocks are more out of favor stocks – the market sees them having less growth potential and/or having negative press or headlines regarding their business.

Both growth and value stocks have indicators that can be used to help decide if a stock is a growth or value stock. There’s no right or wrong approach to stock picking. Whether you decide to use a growth strategy, value strategy, or a blend of both strategies, you can potentially attain positive stock market gains in the future.