Discover What's Better for Your Investment: Growth Stocks or Value Stocks? Learn More Now!

Discover What's Better for Your Investment: Growth Stocks or Value Stocks? Learn More Now!

The stock market is one of the best places to invest money to grow wealth. But with so many options and different types of companies, it can take time to determine the best choice. Growth and value stocks are two of the most popular types of companies, but what are the differences? You can learn the basics of each type of stock and find out which could be the better addition to your portfolio.

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($TSLA - one of the world's favorite growth companies)

As a Growth Stock $TSLA has a 3-year sales growth CAGR of 49%

Data sources: Morningstar, Charts, and company quarterly financial reports. Accurate as of December 31, 2022. (CAGR = compound annual growth rate.)

What Are Growth Stocks?

Growth stocks tend to have a profit margin significantly higher than the average profit margin of other companies in the same industry and higher than the average profit margin of the overall market. Growth stocks also generate significant cash flow and use it to pay dividends to their shareholders or reinvest the cash flow in the company. Growth companies tend to be more expensive than other companies; however, the price of a growth stock is justified by the fact that the stock will most likely quickly increase in value over time. Growth companies usually have a high debt-to-equity ratio, which suggests that the company is using leverage to finance its growth.

Jumpstart your investing journey with this comprehensive guide to growth investing! Equipped with the right tools and strategies, you can set your portfolio up for long-term success with growth stocks.

Investing in growth is not only about selecting rising-value stocks. Growth-focused companies often have come up with an ingenious product or service that either dominates its current sector, enters new sectors, or even establishes completely new markets. Companies that accelerate beyond the regular growth rate over an extended period are often recognized by the market, reaping generous returns for their shareholders.

As the speed of growth increases, potential returns increase too - but high-growth stocks often cost more than other stocks when looking at metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios. Even with their high price tags, investing in the best growth stocks can result in tremendous returns as they realize their awesome growth potential.

How Do I Find Growth Stocks?

To find great growth stocks, you’ll need to identify long-term market trends and which companies best fit to take advantage of the economic standing. For example, The COVID-19 pandemic catapulted many pre-existing trends into warp speed. During that time, electric vehicles and remote employment were huge economic factors. Research suggests that remote working will remain a popular option even when the pandemic is a distant memory due to the cost savings and enhanced worker experience that come with flexible working conditions. Also, we can all agree that electric vehicles will be a massive part of our future.

Now, does every growth stock or growth investing strategy have to start with an economic downfall? No, but realize the general concept is to find the long-term trend and outlook of the economy and then seek out which companies will exponentially rise above others. Some companies will have a competitive advantage over others in the same sector, whether access to cash, marketing deals, production costs, or scalability.

To provide you with some examples, here are ten excellent growth stocks available in the stock market today:

Sourced from Forbes Advisor

Value Stocks vs. Growth Stocks

Investors buy value stocks, hoping that other market participants will eventually realize that the company is undervalued, purchase the shares, and drive prices higher. Value companies aren’t always focused on growth and are more likely to pay dividends.

Dividends - A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it can pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (Wikipedia)

Value companies have lower levels of risk, tend to be less volatile, and often result in limited upside potential. Some investors prefer slow, safe, and steady, while others aim to be aggressive. Historically, growth stocks perform best when interest rates are falling and company earnings are rising. When the economy begins to decline, and the cheap money that often fuels fast growth becomes more challenging to find, growth stocks can be severely impacted.

By contrast, value stocks do well during the early stages of economic recovery due to their healthy fundamentals. Their core businesses are self-sustaining enough that they aren’t seriously compromised when the broader economy takes a sharp turn—that’s when growth companies with lots of debt tend to struggle. As a bull market drags on, value stocks may begin to lag growth stocks.

Analyzing Financial Statements

Analyzing financial statements is fundamentally essential when investing in the stock market. It is crucial to help identify the stock’s actual value, which will help determine if it is undervalued. One standard tool used to analyze financial statements is the price-to-earnings ratio (P/E). The P/E is a valuation metric for a business. It is calculated by dividing a company’s share price by its earnings per share (EPS). A high P/E means the stock is expensive relative to earnings, while a low P/E means the stock is cheap. The P/E is a simple but effective tool that can quickly identify whether a stock is overvalued or undervalued.

The great thing for new investors is that there are apps that will do all of this for you, such as Webull brokerage account. You can scroll through their analytics, and it will inform you if the company is at value, undervalued, or overvalued. If you want to buy your first stock, you can visit Webull.

Suppose you are looking for a company to manage your account, such as an automatic investor, which is probably best suited for new investors here at 5th Investments. In that case, Wealthfront does a phenomenal job.

Side Note:

Companies like Wealthfront, Ally Bank, or Fidelity all have Robo Investors, which means they will automatically manage your portfolio for you. All you have to do in this situation is choose your risk tolerance. The majority of brokerage accounts, like Fidelity, TD Ameritrade, Etrade, etc., also have portfolios that can be self-managed, meaning you have to buy and sell everything yourself. Robo Advisors are great for those who need to put money aside and have it invested. When you start working in a self-managed portfolio, it requires more skill but has more flexibility and potentially can be more profitable if done correctly.

I have provided a list below to remind you of some critical thoughts about a company's balance sheets.

• Financial statements reveal information about a company, including its net profit or the revenue remaining after paying all expenses.

• Sales and revenue growth are critical to a company's financial performance and determining if sales have increased or decreased.

• Investors want to see healthy profit margins, representing the profit earned on each dollar of revenue.

• Companies need adequate cash flow to run their daily operations, making free cash flow a key metric for lenders and investors.

• Outside of just cash flow and profitability alone, we liked to look at the guidance plan. This means they want to build infrastructure, scale with more employees, or add a new product or service. The key is to analyze what has, what will, and what shouldn't change.

Understanding these concepts can help your confidence and future growth as an investor.