In this explainer, we're going to break down the difference between value and growth stocks.
Value stocks don’t offer huge earnings growth potential and don’t necessarily offer huge stock price growth potential. But they’re usually larger and more mature companies.
They can be in defensive sectors — or those that aren’t hurt by economic turbulence — like consumer staples, utilities, healthcare. But value stocks are also usually economically sensitive, or cyclical, sectors like consumer discretionary, industrials, materials, energy, and banking.
A relatively new and small oil company with adequate financing and tons of new exploration opportunities may be in a cyclical sector and may be too growth-oriented to be considered a value stock.
Growth stocks are those that offer huge potential earnings growth and therefore stock price growth.
These stocks will trade at a higher multiple of near-term earnings projections because investors are expecting explosive earnings growth in the medium to long-term. They can be more volatile than value stocks because if they show that they’re not meeting those high earnings expectations, the stock price will fall hard. These are often technology stocks.
So why is all this this important right now?
Well, growth has drastically outperformed value this year. Sure, many value stocks have rebounded nicely from their lows in March, but overall, growth has outpaced value. When investors are nervous about economic growth, they will sell a lot of cyclical value stocks, like large bank stocks, oil, restaurants, retail and apparel.
When economic activity slows, revenues do the same for those stocks. And those investors might pivot into growth, where earnings drivers might be less impacted by changes in the economy. Cloud services, a considerable growth business, will continue to see adoption by people and business through a recession. The same is true for streaming and mobile payments.
To see how growth versus value has behaved this year, watch the quick video above.