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Value vs. Growth: 3 Stocks Investors Should Buy for Each Style
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The battle between value and growth stocks is a very interesting, long-term cyclical one. A spread chart comparing returns from the Dow Jones Industrial Average and Nasdaq index can be useful for visualizing the relationship long-term, and more recently. Trending higher, the market favors value, and trending lower favors growth.
The chart shows that the lowest point in the spread happened during the peak of the Technology Bubble in 2000, after which the market rigorously bid up value stocks. Post 2002, growth slowly but surely, lead for nearly two decades. But then in late 2021, we got very near that extreme low of 2000, and value stocks have again begun to trend higher.
Image Source: TradingVIew
In a more zoomed in view of the chart we can see that the spread has broken out of an inverse head and shoulders pattern over the last few months, favoring value. It has since pulled back though, making it a bit unclear on the next direction. If it trades lower, into the consolidation, that may signal growth stocks are back in favor, but if it turns higher, value should find support.
This is significant because growth stocks have led the market higher so far in 2023. So, we will find out soon if growth back in favor is for real, or just a bear market rally.
Image Source: TradingVIew
I truly don’t know which will be the favorite this year based on the chart. I tend to favor value, but you never know. One way to play the uncertainty is to buy a bit of both, and focus on the leaders of each respective investing style. Then when the spread begins to favor value or growth more clearly, you can lean heavier into the leaders, and cut some of the laggards.
Value Stocks
In the case of another challenging year stocks, like 2022, value is going to be more defensive, and outperform the market. Additionally, many of these companies provide dividend payments, making it easier to weather market drawdowns.
One classic example of a value stock is Procter and Gamble(PG - Free Report) . As a producer of consumer staples such as soap and laundry detergent PG isn’t riding the cutting edge of technology. But it is making money consistently and growing steadily. The stock also holds a Zacks Rank #2 (Buy), indicating a positive trend in earnings revisions.
Although Procter and Gamble stock is on the expensive side, currently trading at 24x one-year forward earnings, above its ten-year median of 22x, sometimes you must pay up for quality.
Making it easier to hold through the tough times is a dividend yield of 2.6%. And PG has raised its dividend every year for 66 years.
Image Source: Zacks Investment Research
Another stock worth considering is Philip Morris International(PM - Free Report) . The tobacco business is currently undergoing a transformation to a combustion free product line and doing so with success.
Philip Morris currently holds a Zacks Rank #2 (Buy) and has a reasonable valuation. PM is trading at 15.7x one-year forward earnings, below its ten-year median of 16.6x, and below the broad market average.
Furthermore, Philip Morris stock offers a 5.1% dividend yield, which has been raised every year since 2008.
Image Source: Zacks Investment Research
McDonald’s(MCD - Free Report) is another great value stock. Over the last 20 years it has had some of the smoothest returns and dramatically outperformed the broad market. Compounding at nearly 19% annually the stock has returned 5x that of the S&P 500.
MCD is also a dividend aristocrat stock, having raised dividends consecutively for 46 years. McDonald’s stock currently has a 2.3% dividend yield. Trading at 25x one-year forward P/E it is just above its 10-year median of 23x, and well off its recent high of 39x.
Image Source: Zacks Investment Research
Growth
Growth stocks are going to do well if inflation can continue to cool, and the Federal Reserve can finish with their rate raising policy. Growth stocks earn high multiples because of their tremendous growth rates, but because interest rates are an important factor in valuing stocks, rising rates have crushed growth valuations. But if the peak in rates is in sight, maybe growth stocks have found the lows.
Because many participants think we are near a peak in interest rates, they have been bidding up growth stocks all year. Cathie Wood’s Ark Innovation fund (ARKK - Free Report) , which invests in disruptive growth stocks has crushed the returns of the S&P 500 ETF (SPY - Free Report) year to date.
Image Source: Zacks Investment Research
One growth stock that has rallied massively this year is Airbnb(ABNB - Free Report) . While ABNB is a growth stock, it is also a company that I deem much less speculative than some others. Airbnb has a proven product, and has been around for 15 years, so it’s not something I would expect to go belly up, even if the stock declines. ABNB also boasts a Zacks Rank #1 (Strong Buy), indicating strong earnings revisions higher.
Image Source: Zacks Investment Research
Admittedly, ABNB has a very rich valuation, currently trading at 38x one-year forward earnings. It is below its one-year median of 51x, and way off its high of 120x, but the stock has not been trading for very long, and went public during a massive bull market.
Airbnb is continuing to grow like crazy though, so maybe the valuation isn’t so ridiculous. Since 2020 ABNB has grown sales from $3.4 billion, to $8.4 billion today. But don’t expect any dividend payments from ABNB though.
Another growth stock that I really consider to be a nice blend of value and growth is Visa(V - Free Report) . As a product hundreds of millions of people use multiple times per day, Visa is not speculative in any way, and it also has rather high sales growth. In V, you get both the security of a value stock, and the high expected returns of a growth stock.
Visa has been a very strong performing stock since its IPO in 2008. V has compounded at nearly 20% annually since then and returned more than 4x that of the broad market. A bit concerning is that Visa’s strong returns line up very succinctly with the dominance of the growth factor, so although V is a great company, I am sure that the broad growth theme helped boost the stock’s returns.
Image Source: Zacks Investment Research
Visa currently boasts a Zacks Rank #2 (Buy), indicating a positive trend in earning revisions.
Visa’s valuation is also right in line with its long-term historical median. Currently trading at 24x one-year forward earnings, it is right in line with its median of 24x, and well off the recent high of 38x.
ServiceNow (NOW - Free Report) is another growth stock that has experienced very strong price appreciation. Over the last 10 years NOW stock has compounded 30% annually, giving IPO investors a 12x return on their investments.
ServiceNow is an enterprise cloud computing business that builds workflows for a litany of high-tech businesses including software and IT, as well as robotics and AI applications. NOW is a platform-as-a-service business that provides technical support for its customers.
Image Source: Zacks Investment Research
NOW is like a prototypical growth stock with parabolic looking sales graphs, and a premium valuation to match. ServiceNow is one of these technology stocks that prefer to be valued based on Price to Sales, rather than Price to Earnings. With a P/E ratio of 150x and a P/S of 10x, there is no way around the fact that it is a pricey stock. Worth noting that sales have gone from $188 million in 2011 to $7.3 billion today, which is kind of mind-boggling.
Image Source: Zacks Investment Research
Bottom Line
While we don’t know who is going to be the winner this year between value and growth, we do know that great stocks, with growing earnings are going to appreciate. Focusing on building a diversified portfolio with both value and growth stocks is a safe way to build wealth. Furthermore, using the Zacks Rank will help identify stocks that are expected to go up in the near term.
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Value vs. Growth: 3 Stocks Investors Should Buy for Each Style
The battle between value and growth stocks is a very interesting, long-term cyclical one. A spread chart comparing returns from the Dow Jones Industrial Average and Nasdaq index can be useful for visualizing the relationship long-term, and more recently. Trending higher, the market favors value, and trending lower favors growth.
The chart shows that the lowest point in the spread happened during the peak of the Technology Bubble in 2000, after which the market rigorously bid up value stocks. Post 2002, growth slowly but surely, lead for nearly two decades. But then in late 2021, we got very near that extreme low of 2000, and value stocks have again begun to trend higher.
Image Source: TradingVIew
In a more zoomed in view of the chart we can see that the spread has broken out of an inverse head and shoulders pattern over the last few months, favoring value. It has since pulled back though, making it a bit unclear on the next direction. If it trades lower, into the consolidation, that may signal growth stocks are back in favor, but if it turns higher, value should find support.
This is significant because growth stocks have led the market higher so far in 2023. So, we will find out soon if growth back in favor is for real, or just a bear market rally.
Image Source: TradingVIew
I truly don’t know which will be the favorite this year based on the chart. I tend to favor value, but you never know. One way to play the uncertainty is to buy a bit of both, and focus on the leaders of each respective investing style. Then when the spread begins to favor value or growth more clearly, you can lean heavier into the leaders, and cut some of the laggards.
Value Stocks
In the case of another challenging year stocks, like 2022, value is going to be more defensive, and outperform the market. Additionally, many of these companies provide dividend payments, making it easier to weather market drawdowns.
One classic example of a value stock is Procter and Gamble (PG - Free Report) . As a producer of consumer staples such as soap and laundry detergent PG isn’t riding the cutting edge of technology. But it is making money consistently and growing steadily. The stock also holds a Zacks Rank #2 (Buy), indicating a positive trend in earnings revisions.
Although Procter and Gamble stock is on the expensive side, currently trading at 24x one-year forward earnings, above its ten-year median of 22x, sometimes you must pay up for quality.
Making it easier to hold through the tough times is a dividend yield of 2.6%. And PG has raised its dividend every year for 66 years.
Image Source: Zacks Investment Research
Another stock worth considering is Philip Morris International (PM - Free Report) . The tobacco business is currently undergoing a transformation to a combustion free product line and doing so with success.
Philip Morris currently holds a Zacks Rank #2 (Buy) and has a reasonable valuation. PM is trading at 15.7x one-year forward earnings, below its ten-year median of 16.6x, and below the broad market average.
Furthermore, Philip Morris stock offers a 5.1% dividend yield, which has been raised every year since 2008.
Image Source: Zacks Investment Research
McDonald’s (MCD - Free Report) is another great value stock. Over the last 20 years it has had some of the smoothest returns and dramatically outperformed the broad market. Compounding at nearly 19% annually the stock has returned 5x that of the S&P 500.
MCD is also a dividend aristocrat stock, having raised dividends consecutively for 46 years. McDonald’s stock currently has a 2.3% dividend yield. Trading at 25x one-year forward P/E it is just above its 10-year median of 23x, and well off its recent high of 39x.
Image Source: Zacks Investment Research
Growth
Growth stocks are going to do well if inflation can continue to cool, and the Federal Reserve can finish with their rate raising policy. Growth stocks earn high multiples because of their tremendous growth rates, but because interest rates are an important factor in valuing stocks, rising rates have crushed growth valuations. But if the peak in rates is in sight, maybe growth stocks have found the lows.
Because many participants think we are near a peak in interest rates, they have been bidding up growth stocks all year. Cathie Wood’s Ark Innovation fund (ARKK - Free Report) , which invests in disruptive growth stocks has crushed the returns of the S&P 500 ETF (SPY - Free Report) year to date.
Image Source: Zacks Investment Research
One growth stock that has rallied massively this year is Airbnb (ABNB - Free Report) . While ABNB is a growth stock, it is also a company that I deem much less speculative than some others. Airbnb has a proven product, and has been around for 15 years, so it’s not something I would expect to go belly up, even if the stock declines. ABNB also boasts a Zacks Rank #1 (Strong Buy), indicating strong earnings revisions higher.
Image Source: Zacks Investment Research
Admittedly, ABNB has a very rich valuation, currently trading at 38x one-year forward earnings. It is below its one-year median of 51x, and way off its high of 120x, but the stock has not been trading for very long, and went public during a massive bull market.
Airbnb is continuing to grow like crazy though, so maybe the valuation isn’t so ridiculous. Since 2020 ABNB has grown sales from $3.4 billion, to $8.4 billion today. But don’t expect any dividend payments from ABNB though.
Another growth stock that I really consider to be a nice blend of value and growth is Visa (V - Free Report) . As a product hundreds of millions of people use multiple times per day, Visa is not speculative in any way, and it also has rather high sales growth. In V, you get both the security of a value stock, and the high expected returns of a growth stock.
Visa has been a very strong performing stock since its IPO in 2008. V has compounded at nearly 20% annually since then and returned more than 4x that of the broad market. A bit concerning is that Visa’s strong returns line up very succinctly with the dominance of the growth factor, so although V is a great company, I am sure that the broad growth theme helped boost the stock’s returns.
Image Source: Zacks Investment Research
Visa currently boasts a Zacks Rank #2 (Buy), indicating a positive trend in earning revisions.
Visa’s valuation is also right in line with its long-term historical median. Currently trading at 24x one-year forward earnings, it is right in line with its median of 24x, and well off the recent high of 38x.
ServiceNow (NOW - Free Report) is another growth stock that has experienced very strong price appreciation. Over the last 10 years NOW stock has compounded 30% annually, giving IPO investors a 12x return on their investments.
ServiceNow is an enterprise cloud computing business that builds workflows for a litany of high-tech businesses including software and IT, as well as robotics and AI applications. NOW is a platform-as-a-service business that provides technical support for its customers.
Image Source: Zacks Investment Research
NOW is like a prototypical growth stock with parabolic looking sales graphs, and a premium valuation to match. ServiceNow is one of these technology stocks that prefer to be valued based on Price to Sales, rather than Price to Earnings. With a P/E ratio of 150x and a P/S of 10x, there is no way around the fact that it is a pricey stock. Worth noting that sales have gone from $188 million in 2011 to $7.3 billion today, which is kind of mind-boggling.
Image Source: Zacks Investment Research
Bottom Line
While we don’t know who is going to be the winner this year between value and growth, we do know that great stocks, with growing earnings are going to appreciate. Focusing on building a diversified portfolio with both value and growth stocks is a safe way to build wealth. Furthermore, using the Zacks Rank will help identify stocks that are expected to go up in the near term.