(Mark in white)
Are you a growth investor or a value investor? Most stock buyers have strong opinions about which camp they fall on.
Value investing focuses on finding stocks that are trading below what you think the underlying business is worth based on metrics such as sales, earnings, and book value. Essentially, he looks for stocks that the market is undervaluing.
Growth investing is a strategy that looks for stocks early in their growth trajectory. While they may not be “cheap” by the standards of a value investor, in theory the massive growth ahead will more than offset the high price.
But what happens when growth stocks start looking cheaper than traditional “value” stocks? Let’s see why value investors might find better deals in growth stocks at current levels.
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The label problem
Do not confuse the terms “growthand “value” to refer to certain industries or types of companies. Most investors associate growth with tech stocks and value with mature, old-world companies.
But in reality, older companies may be in growth mode and tech companies may be value plays. just look Deere and company (NYSE: DE) — a tractor company that was founded in 1868 and is now growing nearly 20% in revenue!
Growth and value investing are proven strategies, but neither describes a specific group of sectors or stocks.
Value stocks look expensive
Two of the most popular stocks among value investors — Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE:PG) — have been decent places to invest during this bear market. Procter & Gamble is up over 9% in the past month, and Johnson & Johnson is actually up on the year.
But while these stocks have certainly benefited from the flight to safety, they don’t look cheap right now on a assessment basis. Johnson & Johnson is trading at a price/earnings ratio (P/E) of 24, while Procter & Gamble’s P/E is 25. In some contexts, the average P/E for the S&P500 currently 19 years old.
Those valuations wouldn’t look too bad if these companies were in growth mode, but both are growing in single digits. This is not to say anything critical of these companies. They have long been two of the highest quality American companies, but at current prices, it’s hard to see an argument for calling these stocks “value.”
“Growth” stocks look cheap
If you consider yourself a value investor, you might start considering technology companies for cheaper prices. As the market focuses on safer stocks, valuations of growth stocks have fallen significantly.
Consider Google’s Parent Company Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL)which now trades at a P/E ratio of 20 while growing its earnings by 23%.
This is a company that controls 92% of the search engine market, and it’s cheaper on a valuation basis than the two previously mentioned “value” stocks.
Deere and Company may be a very old company, but it has made massive investments in technology to drive its future growth. The company said its investments in technology aim to have fully autonomous tractor/plowing solutions in place by 2026.
These investments appear to be paying off, as the company increased its bottom line by 17% year over year. And from a valuation perspective, it looks pretty cheap with a P/E ratio of 15.
Ditch the labels and look for opportunities
Investing in value has nothing to do with buying mature, needy companies, and investing in growth doesn’t exclusively mean buying tech stocks. Investors will benefit from decoupling these types of companies from the “growth” and “value” labels and begin to look for opportunities wherever they are.
And right now, there seem to be more value opportunities in struggling tech companies than in typical “value” games.
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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Mark in white has no position in the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.