Superior Stock Returns: Value stocks or growth stocks? FIN4274

This report delves into the critical differences between value and growth stocks, essential for advanced financial decisions. It begins by defining and contrasting these two investment styles, highlighting their key characteristics, such as valuation metrics, risk profiles, and dividend policies. The report provides literature reviews that support the analysis of both types of stocks. Furthermore, it provides real-world examples, including companies like JPMorgan Chase & Co. (JPM) and Amazon, to illustrate their performance over time, supported by financial data. The analysis extends to comparing the long-term returns of value and growth stocks, aiming to determine which strategy yields superior results. The report concludes with strategic recommendations for investors, emphasizing the importance of portfolio diversification by including both value and growth stocks to balance risk and maximize returns. The findings suggest that while the stock market is unpredictable, a balanced approach is best for long-term investment success.

Advanced Financial Decisions

Superior Stock Returns: Value stocks or growth stocks? 1
Introduction
The prime reason for the investment in an entity is the improvement of the shareholder value,
as dependent on the strategic decisions made by the management of an entity. There are
majorly two distinct investing styles namely the value investing and the growth investing.
The following report would shed light on the differences in the growth and the value stocks,
in terms of the characteristics, categorization of the stocks, long term stock returns. The said
differences would be highlighted with the help of a literature review, and the examples of
both categories of stocks and the performances would be additionally provided. An overall
conclusion would be provided to the discussion that shareholders enjoy better returns by
investing in the value stocks in long run along with a set of recommendations to enhance the
shareholder value.
Literature Review on Value Stocks
The value stocks refer to those shares that are priced at the low levels in spite of the strong
financial position of the company, as reflected by the revenue and profit margins of the
company, followed by the dividends, earnings and similar financial metrics. Hence, it is
expected by the investors of this school of investing that these stocks are currently
undervalued and that the true health would be reflected of these stocks by the increase in the
prices in the future. The prime reason for such an expectation is that these companies have a
proven track records of efficient financial performances. Some key features of the value
stocks can be stated to be as follows.
Firstly, the prices of such stocks are lowers than the peer shares in the same industry. As a
result of which the Price to Book Value ratio and/or the Price Earning of such shares is lower.
Not only in comparison to the peers in the same industry group, but the overall Price
Earnings Ratio is lower than the overall broad market as well (Fama and French, 2012).
Second prime characteristics of the value stocks is that these shares are generally less volatile
in terms of the price fluctuations and the risk in the investment, as compared to the broader
stock market environment. Thus, these shares are generally belonging to the mature company
that is currently facing the adverse events, the news of which has impacted the share prices of
the stocks (Cakici, Fabozzi and Tan, 2013). Thirdly, as these stocks are stable in terms of
prices and earnings, these are suited to the long terms investors group, who are looking for
the long term value increase in the investments, and have time and patience. It is important to

Superior Stock Returns: Value stocks or growth stocks? 2
note that in terms of the risk and rewards, the value stocks are considered to be more risky
than the growth stocks. The reason for the same is that in order to turn these stocks profitable,
the overall perception in the market needs to be changed.
The global stock market has changed dramatically in the recent years and the companies with
stable financial performances that could sustain the changes in the external global
environment have been characterised as value stocks in different countries. As of the year
2019, value stocks is represented by the stocks of the large banks and financial institutions
like JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), Bank of America
Corporation (BAC), Citigroup Inc. (C) and others. Some of the well known shares on the
Australian Stock Exchange of this group are that of the Rio Tinto, Wesfarmers, Woolworths
and others. Thus, the common characteristics of these stocks is that the companies are well
established with a strong set of financials including the asset backing, earnings growth and
others. The list also includes the players like the London Stock Exchange (LSE). The
performance highlight of the LSE over the period of ten years is elaborated in brief as
follows. The share led to the 1130 % returns even after the various fluctuations in the stock
market (The Guardian, 2020). The following graph highlights the same, where blue line
represents NASDAQ.

Superior Stock Returns: Value stocks or growth stocks? 3
(Source: Yahoo Finance, 2020)
In another instance, some of the popular value stocks that led to a whopping increment in the
passing decade on the UK stock changes are that of the JD Sports Fashion (LSE:JD), Ashtead
(LSE:AHT). The said pair of shares is stated as a popular value stock in UK, especially after
the global financial crisis. The stocks led to the returns of 3220 % and 2870 % respectively
and thus rewarded the investors efficiently who were patient to buy and hold (Evans, 2020).
With the record performances as stated above, these shares have placed themselves in the
category of the value stocks as well. Thus, a relatively smaller company can also fall in the
list of the value stocks, if the performance is sound.
Literature Review on Growth Stocks
In contrast to the discussion on the value stocks, in the previous parts, the growth stocks
represent the companies the shares of which are expected to be traded at a higher rate than
that of the market average. It is important to note that when these stocks are viewed
collectively, there is a lack of similarity among these stocks, as each company has a different
product line and must be currently trading high because of different reasons, such as
restructuring, technological changes or favourable political and economic environment.

Superior Stock Returns: Value stocks or growth stocks? 4
The following segment is descriptive of the prime characteristics of the growth stocks. The
key characteristic of a growth stock is that the same do not lead to the payments of the
dividend to the investors, as the belief is to reinvest the earnings for the future business
prospects (Hirshleifer, Hsu and Li, 2013). As these stocks do not generally pay for dividends,
these are not meant to be for the investors that are looking for a steady source of income. The
second key feature of the said stocks is that these are known to outperform the market at large
and are traded at a high Price Earning and/or a Price to Book ratio. It must be noted that
though these investments do not pay the dividends, yet there is a record of high growth of the
earnings in the companies, relying on the innovative business strategies, irreplaceable market
products, huge market capturing and the overall positive sentiments in the market for the said
group of shares. However, in addition to the above, as the growth stocks are constantly in the
run for the innovation through reinvestment, these are known to be having issues in terms of
the liquidity crunch and unprofitable results. It is further important to be noted that there is a
high degree of sensitivity in such category of stocks, with a potential of making or breaking
the market. Thus, while the growth stocks are generally running on a high gear, these are
vulnerable and dependent on the effects of the changes in the external business environment.
Some of the examples of the popular growth stock companies are Facebook, Alphabet, D. R.
Horton, Discovery Communications, Flowserve Corp. (FLS), and others (Duggan, 2018). It is
important to note that the said list is was for the year 2019 and as these stocks are fast
changing as per the external happening, the list fluctuates often.
Generally the growth stocks are that of the small or the mid-sized companies, but these can
also be of the long standing companies. For instance, the technology giant Amazon is known
to be a growth stock by its characteristics of the non-payments of the dividend, and

Superior Stock Returns: Value stocks or growth stocks? 5
reinvestment of the profits. The company is consistently engaged in the diversification in new
business areas and technologies over the years. During the year 2015 to 2019, there was a
stock appreciation of £ 1600 in the share prices of the company with the fact that the
company had went on to become the largest cloud-computing company around the globe
(Warner, 2020). Opening of new markets, efficient corporate restructuring of the retail-
oriented companies led to the P/E of the company of 263 while the P/E ratio of the SP-500
index was of 24.6 in the year 2018 (Cussen, 2019). The following graphs highlights the
growth of the company shares prices over a decade for Amazon. It can be easily assessed
from the graphs that the company has grown tremendously in value.
(Source: Macrotrends LLC, 2020).
Following is the graph of the PR Ratio of the company Amazon over a decade.
(Source: Macrotrends LLC, 2020).
Comparison of value stocks and growth stocks
As stated in the previous sections, there are significant differences in the approaches and the
expectations of the value stocks and the growth stocks. It is expected by the investors of the
growth stocks that these stocks must lead to substantial capital gains to the investments. The
reason for the suck stocks being in the news is that of the innovation and the business
strategies that consistently lead to the competitive advantages in the market. However, such
positive sentiments for a particular share are temporary. Such expectations of the investors
lead to the overvaluation of such stocks in the market. In contrast to this, the value stocks are

Superior Stock Returns: Value stocks or growth stocks? 6
currently under trading or are being ignored by the investors. There may be an eventual
enhancement in the value of such stocks; however investors look for the dividends of such
stocks, to cover the cost of such investments. At times the value stocks are under-priced
because of a poor reporting of earnings for a financial period because of the adverse changes
in the business environment. Thus, as the earnings are less than the expected, the prices are
pulled down. Other times, these stocks are being under traded because of the negative media
attention in connection with a suit or an allegation. However, the strong dividend payment
history of such stocks, still make such stocks reliable, in addition to the overall goodwill of
the brands. Again, the lesser earnings or the negative news are temporary, and the companies
having value stocks are stable in the asset value, business model and the overall ethical facet
as well. Hence, it can be stated that in the long run, the group of value stocks would perform
slightly better than the growth stocks.
Recommendations
Thus, on the assessment of the various characteristics of both the growth and value stocks, it
has been suggested that an investor must opt for the inclusion of both the growth and value
stocks in the long run as well. This is because, the inclusion of both the growth and value
stocks lead to the diversification of the risks and rewards. It must be also noted that the
efficiency of growth stocks is highly dependent on the current business strategies and the use
of the technology. Hence, the appreciation in growth stocks, combined with the stability of
the value stocks is recommended.
Conclusion
The discussions conducted in the previous parts led to the observation of the key differences
in the value stocks and growth stocks. The work was supported by a comprehensive literature
review on the features of both the stocks and the examples of such stocks in the real life
setting. In addition, the performance of both categories of stock is highlighted. It has been
concluded that as the stock markets are unpredictable, the investors cannot rely only on value
stock or growth stock for the overall appreciation of the investments. Rather it is
recommended to diversify the portfolio even in terms of the long run investment, so that the
risk and capital returns are balanced.

Superior Stock Returns: Value stocks or growth stocks? 7
References
Cakici, N., Fabozzi, F. J. and Tan, S. (2013) Size, value, and momentum in emerging market
stock returns. Emerging Markets Review, 16, pp.46-65.
Cussen, M. P. (2019) Income, Value, and Growth Stocks [online] Available from:
https://www.investopedia.com/articles/investing/080113/income-value-and-growth-
stocks.asp [Accessed on: 12 February 2020].
Duggan, W. (2018). 7 High-Growth Stocks That Can't Be Stopped [online] Available from:
https://money.usnews.com/investing/stock-market-news/slideshows/7-high-growth-stocks-
that-cant-be-stopped?slide=8 [Accessed on: 12 February 2020].
Evans, G. (2020) Which FTSE 100 stocks returned over 3,000% last decade? [online]
Available from: https://www.ii.co.uk/analysis-commentary/which-ftse-100-stocks-returned-
over-3000-last-decade-ii510076 [Accessed on: 12 February 2020].
Fama, E. F. and French, K. R. (2012) Size, value, and momentum in international stock
returns. Journal of financial economics, 105(3), pp. 457-472.
Hirshleifer, D., Hsu, P. H. and Li, D. (2013) Innovative efficiency and stock returns. Journal
of Financial Economics, 107(3), pp. 632-654.
Macrotrends (2020) Amazon - 23 Year Stock Price History | AMZN [online] Available from:
https://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-price-history [Accessed on:
12 February 2020].
The Guardian (2020) From JD Sports to Games Workshop: best market performers of decade
[online] Available from: https://www.theguardian.com/business/2020/jan/01/from-jd-sports-
to-games-workshop-best-market-performers-of-decade [Accessed on: 12 February 2020].
Warner, J. (2020) Top growth stocks [online] Available from: https://www.ig.com/uk/trading-
strategies/top-growth-stocks-191030#information-banner-dismiss [Accessed on: 12 February
2020].
Yahoo Finance (2020) London Stock Exchange Group plc (LSE.L) [online] Available from:
https://finance.yahoo.com/quote/LSE.L?p=LSE.L [Accessed on: 12 February 2020].