VALUE OR GROWTH
What type of investment is most profitable?
Some bet on value, others on growth, others consider that virtue is in the middle point and others follow to the millimetre what the emblematic investor Warren Buffett does.
To further heat up the discussion, analysts at JPMorgan and Bank of America have changed their recommendations and after a long time and now they advise value stocks.
JPMorgan sees value companies as undervalued and advises buying, while Bank of America sees 20% value potential for growth.
What is value investment?
Remember that value investing tries to identify companies that are fundamentally undervalued. Proponents of this type of management rigorously analyse both companies and sectors in which they operate to try to determine their intrinsic value.
This intrinsic value is then compared with its market price to identify if the companies are undervalued and are trading at a discount. If so, they invest in them without hesitation. These investors have the belief that sooner or later the Stock Market ends up recognising the value of a company.
Typical value investment companies are characterised by being more stable, with recurring businesses, with easily predictable results, which operate in mature sectors and which allocate a good part of their profits – more than 40% – to dividends. They are the electric companies, the highway companies and the food companies.
Warren Buffett has traditionally been one of the great defenders of value investing, although he complemented this type of management with quality, that is, with a selection of high-quality companies.
The so-called Oracle of Omaha combined undervalued companies with other high-quality companies that had a good business model, a good management team and a solid balance sheet.
His particular style has made him one of the great investors in history. But nonetheless, it’s now down, and last year its investment arm, Berkshire Hathaway, posted the weakest results of the decade.
Due to its low presence in technological companies. The nonagenarian Buffett once said that “at my age there are business models that I neither know nor understand”, referring to technology companies such as Facebook, Amazon, Netflix and Google.
Warren Buffet did, however, hit Apple, which he called “the best business I know in the world.” His 5% stake in the apple multinational has earned him 87,000 million dollars in just the last four years.
The technological companies represent the growth management style. They are companies with strong development, which can continue to grow significantly in the coming years and offer products or services with great added value.
When operating in very changing markets, they need to reinvest their profits in their own business or in buying other companies rather than distributing it among their shareholders.
These types of companies do not usually pay dividends, because they consider that the profit invested in the business, provides more value to the investor than that obtained in the case of paying dividends.
Growth managers agree to invest in companies with very high valuations on the stock market as long as those companies have good growth prospects.
This is what happens now with technology companies, which have skyrocketed in the stock market and are so expensive that only the five Big Techs – Apple, Amazon, Google, Facebook and Microsoft – already represent a quarter of the S&P 500.
Despite Therefore, the growth investor would invest in them, while the value would run off.
Over the past five years, the global index of considered growth stocks has returned an average annual return of 7%, while the index of value stocks reached 4%.
However, there are numerous studies that show that in the long term the value approach exceeds that of growth, with notable defenders such as the aforementioned Warren Buffett or the famous Ben Graham, known as The Dean of Wall Street, who is the father of investment in value investment.
This is a wrong view, and in fact there are companies that are part of both styles of management.
In recent months, the better performance of the technology sector versus the energy or financial sector has been key to the triumph of growth, but that may change in the future if, as JPMorgan and Bank of America foresee, the world defeats Covid, it occurs a recovery in the economy and the Stock Exchanges once again put in value the titles of the most traditional companies.
In the value vs. growth debate, keep the best of each as the two styles complement each other and can serve to bring diversity to the portfolio when used together.