Growth Stocks versus Value Stocks

There is a lot of confusion surrounding value stocks and growth stocks with regards to price appreciation. A growth company (or its stock) has made fast gains in earnings over the preceding few years and is likely to keep on showing such signs of growth. A value company (or its stock) will have a relatively low P/E or relatively high book-to-market ratios. Should I buy value stocks or growth stocks? Portfolio managers and the like have been arguing which of the two offer the best investment for years. In my opinion, the discussion is ridiculous for the following reason:

Stock price appreciation is tied very closely to sales/share and earnings per share (EPS) growth! Stock price will gyrate over the short-term, but the stock price will follow sales and earnings growth over the long-term.

Therefore, it does not matter if you own a value stock or a growth stock because both will follow sales/share and EPS trends over the long term. If you buy a stock just before the company announces a deceleration in sales/share and earnings, the price will depreciate regardless of its designation. The trick is to find companies that are expected to grow and have grown with respect to sales/share and EPS.

Remember, stock price will follow sales/share and EPS. Only a few straight-line growth stocks appreciate considerably over a 5-year period. There are more than 10,000 publicly traded companies in America alone. How does an average person find the proverbial needle in a haystack? Let’s start with independent stock analysts.