The Cyclical Nature of Growth vs. Value Investing (2024)

FAQs

What is the difference between growth investing and value investing? ›

Where growth investing seeks out companies that are growing their revenue, profits or cash flow at a faster-than-average pace, value investing targets older companies priced below their intrinsic value. GARP investors also use intrinsic value to find growth companies that are attractively priced.

For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets. Morningstar.

Betting on value today is a defensive trade

In general, defensive stocks tend to have a market beta of less than 1, meaning they will outperform the broader market when the index falls. In contrast, cyclical stocks tend to have a market beta of more than 1, meaning they will underperform when the index falls.

Value investing focuses on finding undervalued, generally mature, and stable companies. On the other hand, growth investing focuses on young enterprises with the potential to grow at an especially fast rate.

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.

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.

Growth: more prevalent in the technology, communications and biotechnology sectors. Value: often found in the financial, consumer staples and energy sectors.

Learn about the differences between growth investing and value investing. Value investing and growth investing are two different investing styles. Usually, value stocks present an opportunity to buy shares below their actual value, and growth stocks exhibit above-average revenue and earnings growth potential.

Market cyclicality is an important factor when comparing value vs. growth performance. Growth stocks generally perform better during bull markets, when interest rates are falling, and when corporate earnings are trending up. However, during economic slowdowns, growth tends to lag behind value.

A cyclical stock is one whose underlying business generally follows the economic cycle of expansion and recession. Cyclical businesses perform well during economic expansions but typically experience significantly declining sales and profits during recessions and other challenging economic times.

What defines a cyclical investment? ›

Cyclical stocks are those whose returns tend to rise and fall with the economy, because the companies make discretionary goods that people tend to stop buying during an economic downturn. Examples include: Travel: People tend to travel less for vacations and business during recessions.

Examples of Cyclical Industries

For example, the airline industry is a fairly cyclical industry. In good economic times, people have more disposable income, so they are more willing to take vacations and make use of air travel. Conversely, during bad economic times, people are much more cautious about spending.

Certainly, there is usually a positive correlation between the two. Slow-growth companies often sell at low valuations and high-growth companies often sell at expensive valuations. In an attempt to simplify, the two continuums are often merged into one, with value at one end and growth at the other.

Value stocks are considered relatively less risky compared to growth stocks. They are typically more stable and have lower volatility. The potential for capital appreciation may be moderate, but they often offer steady income through dividends.

Investment and Economic Growth. Investment adds to the stock of capital, and the quantity of capital available to an economy is a crucial determinant of its productivity. Investment thus contributes to economic growth.

Value stocks are expected to gain value eventually when the market corrects their prices. In the unlikely event that the stock doesn't appreciate in value as was expected, investors can lose their money. Hence, value stocks are relatively riskier investments.

The question of which investing style is better depends on many factors, since each style can perform better in different economic climates. Growth stocks may do better when interest rates are low and expected to stay low, while many investors shift to value stocks as rates rise.

We find reliable evidence that value stocks are riskier than growth stocks in bad times when the expected market risk premium is high, and to a lesser extent, growth stocks are riskier than value stocks in good times when the expected market risk premium is low.