Value vs. Growth: Which is better?

The distinction between value and growth can be murky. Value stocks trade at cheap valuations relative to their fundamentals, while growth stocks are associated with companies that have the potential to achieve high earnings growth.

Many companies, in fact, will have traits of both. And while value and growth investing approaches differ, they do overlap. Value investors shouldn’t ignore a company’s growth prospects, and growth investors shouldn’t ignore a stock’s valuation.

As Warren Buffett, the best-known value investor, has written:

“In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous ...”

Value investors liken their approach to buying a $100 bill for $80. That is, they buy stocks at a discount to their fair value.

A stock might be underpriced for a variety of reasons. Supply chain disruptions, for example, have hindered the sales of some companies over the past year. Value investors essentially bet that these reasons will be short-lived, not a sign of things to come.

Unlike value investors, growth investors will pay a premium for a stock if the company’s future looks bright. Often price-to-earnings ratios on growth stocks can appear highly inflated versus the rest of the market.

But with high earnings growth, even a stock with a high valuation can pay off.

Common Value Stock Characteristics

Slower growth of sales and income

Lower valuations versus their history

Highly predictable financial performance

Mature businesses

Higher dividend yield

Dividends make up a large share of the total return

Less volatile than broader market

Common Growth Stock Characteristics

Higher sales and income growth

Higher valuations versus the broader market

Financial performance can be volatile

Often “disruptive” companies with new business models or technologies

Pay minimal or no dividends

Dividends contribute less to total return

Stock more volatile than broader market

Sources: “What to Look for in Value vs. Growth Stocks,” Nasdaq.com, March 22, 2021; “2 Schools of Investing: Growth vs. Value,” Fidelity.com, accessed April 28, 2022.

Russell 1000® Value Index

Russell 1000® Growth Index

Price-to-book ratio 2.66 12.73

Price-to-earnings ratio* 16.06 30.33

Dividend yield 2.01% 0.78%

5-year earnings-per-share growth 10.48% 25.78%

Sources: FT Russell 1000 Value Factsheet, FT Russell 1000 Growth Factsheet, FTRussell.com, as of March 31, 2022. *Excluding companies with negative earnings.

Two Sides of the Same Coin?

Typically, value stocks are more defensive and do well in the early stages of an economic recovery.2 Growth stocks do better during bull markets and when inflation and interest rates are falling, which boosts the value of their future earnings.3

For today’s investor, here’s the challenge. Will high inflation and rising interest rates continue to weaken growth stocks? Or will easing supply chain bottlenecks, tighter monetary policy, potentially slower economic growth and expiring pandemic-related federal stimulus get inflation back under control? Inflation expectations for the coming year have shot up, but longer-term expectations remain relatively low. 4

Investment Ideas

Growth stocks such as Amazon, Zoom and Peloton boomed during the pandemic. As the economy has reopened, however, their performance has lagged. In contrast, value stocks have gained favor as the economy has picked up. Looking ahead, should investors favor value or growth?

Commonly Held Value Stocks

P/E

P/B

1-Year Total Return (%)

10-Year Annualized Total Return (%)

Berkshire Hathaway Class B (BRK-B) 8.9 1.5 41.2 15.8

JPMorgan Chase (JPM) 9.2 1.6 -4.1 13.8

Johnson & Johnson (JNJ) 22.4 6.2 10.8 12.4

UnitedHealth Group (UNH) 28.4 6.7 40.1 26.0

Procter & Gamble (PG) 26.6 8.3 16.6 10.2

Source: Yahoo! Finance, Morningstar, March 25, 2022.

Commonly Held Growth Stocks

P/E

P/B

1-Year Total Return (%)

10-Year Annualized Total Return (%)

Apple (AAPL) 28.9 39.5 45.7 23.8

Tesla (TSLA) 223.3 37.4 72.1 64.7

Amazon.com (AMZN) 50.5 12.0 6.0 32.6

Meta Platforms (formerly Facebook) (FB) 16.0 4.8 -22.2 N/A

Nvidia (NVDA) 71.9 26.1 115.2 53.4

Source: Yahoo! Finance, Morningstar, March 31, 2022.

Value and Growth Funds

VALUE FUNDS/ETFs

Ticker

iShares Russell 1000 Value (Large Cap) IWD

SPDR Portfolio S&P 500 Value SPYV

Invesco Dynamic Large-Cap Value PWV

Schwab U.S. Large-Cap Value SCHV

Vanguard Large-Cap Value VOOV

GROWTH FUNDS/ETFs

iShares Russell 1000 Growth (Large Cap) IWF

SPDR Portfolio S&P 500 Growth SPYG

Invesco Dynamic Large Cap Growth PWB

Schwab U.S. Large-Cap Growth SCHG

Vanguard Large-Cap Growth VOOG

Source: Yahoo! Finance, as of April 19, 2022; “What to Look for in Value vs. Growth Stocks,” Nasdaq.com, March 22, 2021.

GARP: ‘Growth at a Reasonable Price’

Can’t choose between value and growth? Consider a compromise. Some investors pick companies that exhibit a few qualities of both value and growth, referring to their approach as “GARP” — growth at a reasonable price.

Also, some funds strike a balance by investing in some of each. Often these are referred to as “growth and income” or “blend” funds.

Investment Options

GROWTH AND INCOME FUNDS Ticker

Vanguard Growth and Income Fund VQNPX

Fidelity Growth and Income Portfolio FGRIX

Invesco S&P 500 GARP SPGP Source: Yahoo! Finance, as of April 19, 2022; “What to Look for in Value vs. Growth Stocks,” Nasdaq.com, March 22, 2021.

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Footnotes:

1 Berkshire Hathaway, 1992 Shareholder Letter, Berkshirehathaway.com, accessed April 19, 2022.

2 “What to Look for in Value vs. Growth Stocks,” Nasdaq.com, March 22, 2021.

3 “Why U.S. Value Stocks Are Poised to Outperform Growth,” Vanguard.com, April 30, 2021.

4 “New Index Shows U.S. Inflation Expectations Shifting Higher,”USNews.com, March 8, 2022.