Value and growth are two of the main styles in stock market investing. Today I’d like to discuss these two approaches as well as several UK-listed shares so that you can make more informed investment decisions.
Value vs growth
Warren Buffett is regarded as one of the best investment managers in the world. An investor who put £1,000 into his US-based financial services company Berkshire Hathaway 50 years ago would now have over £9m. He has been a life-long believer in the long-term value-based investing style.
Value investors aim to pay a low price for a company relative to the value they receive. And to find a stock’s real value, one has to look beyond the price. Mr Buffett is interested in undervalued companies that make money and generate ample cash.
Why invest in value? Value investors believe that sooner or later, markets will appreciate a given firm’s intrinsic value, leading to an increase in share price.
On the other side of the coin is growth investing. Such investors aim to find businesses that are likely to grow faster (either by revenue, cash flow, or most importantly profit) than the rest.
Most growth companies do not offer dividends as management reinvests earnings in the business to expand operations.
Why invest in growth companies? Their attraction is the potential sizeable upside in the stock price. As a result, stock price movements of these companies tend to be rather volatile.
FTSE 100
The FTSE 100 consists of the top 100 UK-listed stocks with the biggest market capitalisations. Most FTSE 100 companies are multinational conglomerates and up to three-quarters of their revenues comes from overseas. As one of the highest-yielding markets in the world, the FTSE 100 currently has a generous dividend yield of 4.5%.
Whenever I look for value, I usually start with the FTSE 100 and screen for companies whose share price may be suffering for what I estimate to be a temporary period.
Most of the shares in the index also declare regular dividends. Even if the share price doesn’t appreciate fast, I rest assured that I’d benefit from dividend payments.
The two companies I’m watching right now are insurer and asset manager Aviva as well as advertising and PR giant WPP. Their respective forward P/E ratios are 7.4 and 10.2. Given the respective dividend yields of 6.9% and 4.3%, both companies may possibly deserve to be on the shopping list of value investors.
FTSE 250
Companies in the FTSE 250 index have a more domestic focus yet smaller market caps than their FTSE 100 counterparts.
I believe investors can find both value and growth in the index.
Indeed if you were to look at graphs of the performance of a FTSE 100 vs FTSE 250 tracker over the past two decades, you would possibly be highly impressed with the compound annualised growth rate (CAGR) of the FTSE 250.
My Motley Fool colleague Alan Oscroft concludes that “if you’re looking for growth, you should invest in smaller companies”.
As I get ready to look beyond the general election in December, the three FTSE 250 companies I’m currently doing due diligence on are high street bakery Greggs, recruitment specialist Hays and ingredients firm Tate & Lyle.
On a final note, if you’re unsure about which investing style may suit your needs, you may want to talk to a financial adviser first before moving forward with a specific type of investment.
