Question of the week
On stock markets, it has become common to compare securities called “growth stocks” to those called “value stocks.” This approach differs palpably from the traditional opposition between “cyclical stocks” and “defensive stocks.”
The expression “value investing” has been around for a long time. This refers to the idea of investing in securities judged to be “cheap” compared to what they really should be worth. This kind of investing is traditionally associated with Benjamin Graham (1894-1976) and Warren Buffett (1930-): the point is to look for quality at a reasonable price. Nowadays, value investing is associated with certain sectors whose market valuations are known for being attractive (low PER, generally high dividend). These include, in particular, the banking sector, the industrial sector, or the automobile sector. These sectors are generally the same ones that are called “cyclical,” that is to say, sensitive to economic conditions.
The expression “growth investing” refers to the idea of investing in securities benefitting from a rapid increase in their revenue. These are generally securities distinguished by their being innovative or by their positioning on major social trends. Securities said to be “growing” belong in particular to the sectors of emerging technologies, biotech, luxury, or renewable energy. Despite their excellent dynamics, these securities are generally riskier, since their valuation can be very high compared to their fundamentals. This segment thus requires being very selective.
Growth stocks are not synonymous with “defensive stocks.” On the contrary, the latter are associated with sectors that are not sensitive to bandwagon effects or economic conditions, and which have lower-than-average market volatility. Among these are certain telecom companies, the health sector, or the mass retail sector.
Thus, an investment fund is said to adopt either a “value” or “growth” investment style depending on which of these investment approaches its strategy tends towards.
The opinion expressed above is dated 19th April 2021, and liable to change.
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