As the U.S. economy exits the recession, and balance sheets at publicly-traded companies return to healthier levels, equity investors are paying closer attention to companies that are growing rapidly and cheaply priced.
The two main types of investment approaches — growth and value — both have advocates on Wall Street because of several unique characteristics that make each style appealing to different types of investors.
Growth Investment Approach
In a growth investment strategy, investors opt for companies that post better-than-average earnings gains in hopes that the company will continue to deliver high profit growth. Often such companies are developing new technologies or products, and are considered by the investment manager to be well-positioned in a rapidly growing industry.
Some common ways to execute a growth strategy is by investing in emerging markets, recovery shares, blue chip stocks and smaller companies.
Growth stocks do, however, also come with risk. For example, if the growth rate fails to live up to expectations, the price of the security can tumble as in the case of many technology companies during the dot-com bubble of the late 1990s and early 2000s.
Value Investment Approach
For investors who are less tolerant of the risk associated with high-priced growth stocks, a value investment style could be a more viable approach. Under this approach, the investment manager buys undervalued companies to capture the potential returns that may occur when the market price rises to reflect the companies’ hidden values.
These bargain stocks typically have low price-to-earnings ratios, low price-to-sales ratios and high dividend yields. Long-term investors, in particular, benefit from a value approach because the returns may become larger over time.
As with the growth investment style, there are some drawbacks to the value investment approach. For example, buying shares in a bear market using the value approach may result in the purchase of shares that are overvalued as the share price could still drop along with the market.
Another potential danger of the value approach could arise when a company has problems that justify its low share price, causing investors to hold on to the security for longer than intended to generate a return.
For investors seeking to diversify their investment style, building a portfolio that combines both growth and value stocks may be a viable option. Sometimes known as core equity portfolios, this approach blends growth and value stocks, emphasizing larger, blue chip quality growth companies with dominant industry positions.
Regardless of whether you select a growth or value approach to investing – or a combination of both – there are professional investment managers available to help.
A financial advisor can help you select the specific growth or value investment manager– or a combination of both – who is suitable to help you pursue your investment goals, and help you with the ongoing review of a professionally managed portfolio.
Michael B. Kemp / Senior Vice President
Meridian Wealth Management at UBS Financial Services Inc.
The information contained in this article is based on sources believed reliable, but its accuracy cannot be guaranteed. This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial advisor, as well as your tax and/or legal advisors regarding your personal circumstances before making investment decisions.