Do growth stocks outperform value stocks?
Growth, History Is on Value's Side. Historically, value stocks have outperformed growth stocks in the US, often by a striking amount. Data covering nearly a century backs up the notion that value stocks—those with lower relative prices—have higher expected returns.
When investors invest in growth stocks, they have an eye toward huge future capital gains. Unlike value stocks, which many investors choose because of strong fundamentals, growth stocks are often selected because of the stock's strong potential for growth, even if its current earnings are low.
While growth stocks handily outperformed value from 2015 through 2021, 2022 was a different story. Growth stocks, represented by iShares S&P 500 Growth ETF (IVW), sank 30% in 2022.
Growth stocks have the potential to significantly outpace the market average, which is ideal. If you're looking for a growth stock that can beat the market, the Vanguard Growth ETF (VUG -0.94%) can do the trick.
We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.
Value dominance tends to assert itself when inflation is high, economic growth is strong and rates are elevated. By contrast, Growth stocks often outperform when inflation is low, economic growth is relatively weak and rates are low and falling.
- Volatility: Growth stocks can be more volatile than other types of investments, leading to greater short-term fluctuations.
- No dividend income: Investors seeking regular income through dividends may find growth stocks unsuitable.
- Risk: High valuations may not always materialise, leading to potential losses.
Though there is no ideal time for holding stock, you should stay invested for at least 1-1.5 years. If you see the stock price of your share booming, you will have the question of how long do you have to hold stock? Remember, if it is zooming today, what will be its price after ten years?
Traditionally, growth investors focus on companies that increase their sales or earnings quickly, while value investors focus on stocks that trade at low valuation multiples. Buffett thinks value and growth are two variables in the same calculation, meaning investors shouldn't prioritize one over the other.
A common perception is that value stocks are more cyclical and therefore more vulnerable to economic downturn. We find that this conventional wisdom is false: empirical evidence shows that value stocks actually tend to outperform in recessions.
Why not to invest in growth stocks?
Generally, growth stocks are more expensive, as investors value them based on above-average past and, more so, future growth. However, they're also riskier, particularly because if a growth stock doesn't meet lofty expectations, the share price often drops considerably.
The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, Uber Technologies, and Zoom Video Communications.
Companies that have growth-oriented stocks typically have higher earnings growth, cleaner balance sheets, and better profitability—all traits that often help them hold up better than companies with cheaper stock prices during recessionary periods. But growth stocks haven't fared well during every recessionary period.
“We don't think the economic environment in 2024 is going to be good enough to support value outperformance,” LPL Financial chief equity strategist Jeff Buchbinder recently told Morningstar. “Remember, growth stocks tend to do better with lower interest rates and modest inflation environments.
| Stock | 2024 return through March 31 |
|---|---|
| Janux Therapeutics Inc. (JANX) | 250.9% |
| Trump Media & Technology Group Corp. (DJT) | 254.1% |
| Super Micro Computer Inc. (SMCI) | 255.3% |
| Viking Therapeutics Inc. (VKTX) | 340.6% |
Additionally, value funds don't emphasize growth above all, so even if the stock doesn't appreciate, investors typically benefit from dividend payments. Value stocks have more limited upside potential and, therefore, can be safer investments than growth stocks.
While the timing of interest rate cuts is uncertain, the Fed had penciled in three rate cuts for 2024 in its last meeting. More appropriately priced cost of capital has far-reaching implications and is particularly beneficial for value stocks.
- DaVita Inc. ( ticker: DVA)
- DraftKings Inc. ( DKNG)
- Extra Space Storage Inc. ( EXR)
- First Solar Inc. ( FSLR)
- Gen Digital Inc. ( GEN)
- Microsoft Corp. ( MSFT)
- Nvidia Corp. ( NVDA)
- SoFi Technologies Inc. ( SOFI)
Volatility in Growth Stocks: Growth stocks are often subject to significant price volatility, as their valuations are influenced by market expectations and sentiment. This volatility can result in rapid price fluctuations, leading to potential losses for investors.
| S.No. | Name | CMP Rs. |
|---|---|---|
| 1. | Rama Steel Tubes | 12.33 |
| 2. | Brightcom Group | 15.14 |
| 3. | Easy Trip Plann. | 44.90 |
| 4. | Radhika Jeweltec | 66.16 |
Are growth stocks undervalued?
Growth stocks are often relatively correctly valued or sometimes even overvalued, because of their significantly high growth rate. Hence, they are higher priced in the market.
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour. For example, if a stock closed at $40 the previous day, opened at $42 the next, and reached $43 by 10 a.m., this would indicate that the stock is likely to remain above $42 by market close.
Here's a specific rule to help boost your prospects for long-term stock investing success: Once your stock has broken out, take most of your profits when they reach 20% to 25%. If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position.
And it might be refreshing to see that Warren Buffett and his team, who are known for their value picks, have a few top growth stocks as well.
