Should You Buy Growth or Value Stocks? You Don’t Have to Choose Just One - TheStreet

NEW YORK (Real Money) -- I have been testing various methods of picking stocks and managing a portfolio of equities. I am not having a stock picker's mid-life crisis or doubting my personal preferred methodology; rather, I am prepping for a book.

While my wife is not really excited about me spending even more time in the office hunched over the keyboard and every editor in the world is lining up excuses not to touch a manuscript filled with examples of my stellar typing abilities, it is a project I have been putting off for too long. My research has turned up some fascinating information and conclusions, and has shattered more than a few myths.

I have never been one to engage in the value-versus-growth argument as the evidence indicates that they both work when applied properly. The combination of growth and momentum has been proven as has the combination of value stocks with strong balance sheets. As part of my research effort, I tested some growth momentum combinations and found one model that works very well.

The model is simple. I used five-year book-value growth because I think it is the best measure of a company that is truly growing. My minimum threshold for five-year book-value growth was 25%. If the earnings and cash flow are successfully reinvested, then the total net worth of the company should grow accordingly. I cannot get away from my inner cheapskate, and so I refuse to pay more than 25 times earnings for this rapid growth. Finally, I want some momentum, and so the stock had to have gained at least 10% during the past quarter.

It is not the best screen I ever tested, but it is on the short list of top-performing screens and outperforms the market over the 20-,15-, 10- and five-year periods. Interestingly, the screen had times where it underperforms just like the value screens I use, but those don't occur during the same time periods. That seems to confirm the work of Cliff Asness, who found that momentum returns are similar to value but are not correlated.

I ran the screen this morning and found some interesting names on the list. Apple (AAPL) - Get Report is at the top. The consumer and tech innovator's book value has increased by 33% annually, and the stock trades at just 18 times earnings. Rounding out the top five ranked by market capitalization are Boeing (BA) - Get Report, American International Group (AIG) - Get Report, Salesforce.com (CRM) - Get Report and AutoZone (AZO) - Get Report.

There are signs of an energy rally in the growth and momentum list, as well. Continental Resources (CLR) - Get Report, Gulfport Energy (GPOR) - Get Report and C&J Energy Services (CJES) all make the current list. As the model rebalances monthly, they could drop out quickly if the momentum doesn't hold, but for now, they are on the buy list.

Patrick Industries (PATK) - Get Report continues to benefit from the slow grinding economic and housing recovery in the United States. The company makes products for manufactured homes, recreational vehicles, and the industrial companies, and business has been pretty good. Sales in the RV market have been particularly strong, rising 35% in the fourth quarter from a year earlier. The company's book value has increased by 47% on average annually during the past five years, and the shares fetch just 18 times earnings.

IPG Photronics (IPGP) - Get Report makes high-powered lasers that are used in material processing around the world. The company's lasers are used in manufacturing processes, welding and cutting devices, and business has been very good of late. Book value has risen by 32% annually during the past five years, and the stock just makes the grade with a price-to-earnings ratio of 25. The trend toward automation around the world should allow IPG to continue to grow at a strong rate in the years ahead.

This screen works well over time. It returns about 50 names right now, and so it's possible to pick and choose enough stocks to put together a diversified portfolio of growth and momentum stocks that are not priced for perfection.

Arguing about growth and value is silly. They both work. The question is which strategy or combination of strategies fits your personality and skill set.

Editor's Note: This article was originally published at 1 p.m. on Real Money on April 28, 2015.

At the time of publication, Melvin held no positions in any of the stocks mentioned.