Growth vs. Value Stocks — What’s the Difference?
Three things we look for before buying stocks:
Okay, one thing — but 3X important!
And today, I realized something … I’ve never fully explained the difference between growth stocks and value stocks!
This is a key distinction that I want to make sure you know.
See, America 2.0 is an idea built on growth stocks. We focus exclusively on growth stocks. But why?
Growth stocks can be the difference between short-term value and — what we look for — long-term massive, phenomenal, rising potential.
So, check out today’s video to see the difference and why we’re all in on America 2.0. I’ll show you how to spot the difference with a few specific sectors:
The Difference Between Value Stocks and Growth Stocks
What is the difference between value stocks and growth stocks? After reading the question I realized I never defined this for people. We talk about our stocks as being America 2.0 stocks and Fourth Industrial Revolution stocks, but many people have no idea what those are because you probably never watched my America 2.0 presentation.
You have no idea what the Fourth Industrial Revolution is because still in the media and social media it’s less discussed.
It’s in the background where people are talking about all these new technologies and megatrends, Internet of Things (IoT), artificial intelligence (AI), 3D printing, the use of lasers, the coming of new industries like space, precision medicine, the transition from carbon-based energy to sustainable energy.
All these put together is the Fourth Industrial Revolution. These are largely represented in what the investment management world or Wall Street, as it’s referred to, call growth stocks. We call them America 2.0, Fourth Industrial Revolution stocks. Then there are stocks that really are non-participating in all these trends and technologies.
They are generally referred to as value stocks. Today I want to draw the contrast between value stocks and growth stocks. Just to make it clear, we focus exclusively on growth stocks. Even more, we focus on these megatrend stocks that are really looking out at the future.
If you are looking at a value stock, generally speaking it is based on the financial statements.
It’s based on financial statements and financial statement analysis. What people do is look backward at a company’s income statement, their balance sheet and their statement of cash flows. They then come to an understanding of the nature and characteristics of the business and its ability to replicate what has happened in the past in the future.
Generally speaking if you are looking at a product like Hershey’s chocolate or something like that, this is a company that’s been around for a long time. It still gets a great deal of its sales from its original products. There’s a nice, stable trend you can count on.
By looking at the financial statements you can also make certain assumptions on when Hershey’s might raise the price of its chocolates and candies or the rate of growth it might experience. Chocolate is a mature product. It has been around a great deal.
You come to a series of assumptions around which you can make assumptions based on the past for the future. Those are based on three primary financial statements. The income statement, which really has everything about sales. The balance sheet is based on assets.
In other words, everything from cash to buildings to intangible assets like trademarks and patents. Then there’s the statement of cash flows, which measures all the different flows of cash that happen within a company with respect to its operations, investments and anything where cash is moving.
That’s number one. It’s based primarily off financial statements. The second is that value stocks are generally selected by people based on valuation. They are very focused on measures like PE ratio. It represents price-to-earnings ratio.
Without getting into a complicated explanation, price represents the actual share price and earnings represents the total profits of the company, which is referred to as net income, divided by the total number of shares out there. Now you get something called earnings per share (EPS).
They take the price and divide it by the EPS to come up with the PE ratio. Many value investors are very sensitive. They want PE ratios that are under 12 or 15 or 16. Oftentimes, if they can find one for 8, 9 or 10 and it fits their way of analysis based on financial statements, it gets them excited and they want to own these companies.
In the current environment you can find a lot of these companies among the slow-growing companies in finance, old food industry companies. Those are considered value stocks. Some of them have high PE ratios, nonetheless they fit the previous requirement that based on their financial statements you can come to an extrapolation as to where their numbers are going to be.
The other thing that value investors are focused on is that they want their companies to show actual profits. Many of you will be saying, “How can you pick a stock without profits? How can a company have value without profits?” I will disagree with that, but I will cover it in the growth section.
This is a contrast because in growth, profits are something that are set aside. Usually growth companies are investing back in their company at such a rate that there are often no profits. This is something that’s an issue for value stock investors. They want to see profits regularly show up.
They want any investment being made into the company to come from excess. The third thing I can point to is that people are also focused on what the assets are. They do this by focusing on the price-to-book value (P/B). The book in this case represents the value of all the assets on a company’s balance sheet.
It can be land, buildings, cash generative trademarks or patents, cars or any asset of any kind. People are looking to buy this cheap because when you look at a balance sheet you can see everything is valued at cost and depreciated.
You can come up with a book value that’s approximately where the value might be if you liquidated all these assets. Value investors are often focused on book value and P/B and trying to get cheap ones with the idea they are getting a bargain. If they are getting a bargain, other investors will figure this out and come to bid the price of the company up.
Or someone might come buy the company out to get control of these assets. Bottom line to value investing is the idea that past trends will predict the future with some amount of certainty. That’s the essence of it. You are looking backward and you make a judgement based on financial statements that the past trends are a reflection of what the future is going to be.
Growth investing is almost from another planet. Those of you who are familiar with stocks like Tesla and read analysis, it’s largely written by people who have a value orientation. They will say Tesla should be bankrupt, it deserves to have no value, they never make enough cars, they have no profits.
That’s because the number one tenant is that it’s based on growth and future growth. They look at what the company is at today in terms of growth and then there is an extrapolation that is made that this growth is going to continue and often even accelerate.
Oftentimes into the first period of growth, most investors and the market even tends to underestimate the magnitude of that growth and how long it’s going to go. As a result, forward-thinking investors or growth investors who are willing to invest will see there are always people who are surprised by both the magnitude and length and want to buy these stocks increasingly.
Or in other times, there are a number of people who are betting against the stock who are forced to come and buy it in an act that’s called short covering. Short in the stock market means someone betting on a stock going down.
So the number one, big difference between value and growth is that it’s based on current growth and future growth. The future growth is oftentimes assumed to be accelerating, which is a critical factor for growth investors.
This growth is not measured by profits or the assets on the balance sheet or ratios, it is measured by sales growth and accelerating sales growth. In other words, a growth investor would want to feel that over the next one, three, five, seven years that a company will go from 15% growth, to 20% growth, to 25% growth.
It will never be in a perfect, straight line, but looking out over three, five or seven years, the average level of growth will have seen an accelerating trend. This is a critical factor for growth stocks and growth investors. Sales growth, accelerating sales growth over a long period of time, usually three to seven years.
Obviously when an investor is doing that, I like to tell my subscribers that when you look at the future and are betting on future growth, there are really no past financial statements you can count on because the growth is still new. Tesla is a great example.
Tesla is a Growth Stock
Until quite recently when they issued the Model 3, they largely only produced 50,000 or 100,000 cars in their entire life. Yet, even by the time they had just begun to sell the Model 3 they were valued nearly as big as the entire car industry. Many people were confused or felt it was wrong.
However, the reality is the folks who are investing in Tesla — we do have Tesla in our Profits Unlimited portfolio — are looking out at the future and believing different things than people who have a value orientation and are looking at the numbers saying Tesla doesn’t deserve at $600 billion valuation.
I am a growth investor. I can tell you my thesis for Tesla. I believe Tesla is going to dominate a minimum of two large and growing industries. One if the industry of autonomy, which is what its car business will eventually turn into. The vast majority of cars it sells will turn themselves into robotaxis.
They are a form of mobility that will allow a lot of people today who are unable to afford a car the ability to get into something that is safe, cheap and convenient. This is the way innovation happens. It increases access at a cheaper point in a convenient way.
That is an industry that is going to expand the mobility market which today we think of as automobiles, cars and public transportation. However, it’s a complete reorientation in terms of how an entire industry will be in the future. I assign a very high value to it.
I believe the sales are going to be significantly larger. The second one is their energy business where they solar roofs, the Powerwall and an industrial battery business which is in its very early stages of massive growth as we transition from carbon-based energy to using energy from the sun, wind and waves.
We need to store it and use it as the point of consumption. Tesla is a leader in this as well and it’s very early in that business.
When you look at both of these businesses and look at both the magnitude of the growth they can experience and how long it can persist, that’s the basis of how I look at Tesla and tell people, even at current prices, we still believe there is significant upside in it.
That’s a view that’s confirmed by Cathie Wood at ARK Invest who has a very similar mindset and thought to someone like us.
The third aspect of growth investing is that there is often a reconception of a business of an industry or sector that is different than the mindset of people who have a backward-looking view and base it on a value way of thinking, which is based on financial statements.
The fourth thing I would say is that oftentimes recreate an industry or just create a brand new industry out of scratch. A great example is space. This is an industry I have made several videos on that I am incredibly bullish, optimistic, positive — BOP — as I like to say.
We are talking about blue sky opportunity here. We sent a man to the moon in 1968 and after that the space industry has been burbling out there making small improvements. Then we had Elon Musk take his PayPal fortune and put half of it into SpaceX. It’s now a $74 billion company.
It’s now capable of sending rockets into space and bringing them back. It’s sci-fi, folks. Even when you watch it it seems unbelievable. And he has bigger plans, which is to have a lunar colony and then to have a Mars colony. If you are watching on YouTube, you can see the progress that’s being made daily toward this.
This is the creation of a brand-new industry. Someone might look at a valuation for SpaceX where it has a $74 billion valuation and say, “Why does it deserve that?” That’s because people who are investing SpaceX look at the potential value of the space industry, manufacturing in space, having a colony in space, eventually colonizing Mars.
For some people it seems funny. But I can tell you as someone who was laughed at all the time because of early investments in Google and Netflix, this is something that is quite common as a growth investor. You are going to be laughed at. You are going to be mocked.
Generally speaking, growth investments never seem sensible. They never lend themselves to the comfortable logic that value does where you can go back and look at financial statements and come up with numbers to put in Excel and create models easily.
Instead, growth does require you to look forward and think to a different way of living, a different way of having these products and services in the economy and how people are going to be served. In the end, growth and value represent very different ways of looking at the world.
In my judgement, this is an extraordinary moment if you are willing to be a growth investor. We have all of these unbelievable megatrends going on simultaneously. It’s a lollapalooza effect where the benefit of one stacks on the other and then stacks on the other.
A great example of this is 3D printing and space. They are rolling along together, each benefitting each other. Chips and AI or IoT and AI and blockchain are all stacking on each other. In my opinion, this is a once-in-a-lifetime opportunity to buy into technologies, products, services and companies that represent them in their early stages.
That’s why at Bold Profits we focus exclusively on these America 2.0, Fourth Industrial Revolution and growth companies. If you are interested in that, check into ProfitsUnlimited.com. That’s my video for this week: Value vs Growth. I believe this is an historic opportunity to buy into growth because of the presence of these megatrends you can invest in.
Editor, Profits Unlimited
P.S. I talk about Tesla today as a great GROWTH stock example. Tesla is innovating and transforming the electric vehicle (EV) and battery industries. Now, I have another growth opportunity to tell you about. It could be 10X bigger than EVs. Check out the story here in another video I made for you.