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PreMarket Prep: Value Vs. Growth Stocks

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PreMarket Prep: Value Vs. Growth Stocks

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.

The open format of the PreMarket Prep show allows the hosts to go into detail on topics of interest to our viewing audience. Since a lot of terms are used on Wall Street in a broad manner, it is important for investors old and new to have a better understanding of market jargon.

Thursday’s topic came from a new investor who was seeking to gain a better understanding of growth vs. value stocks.

The timing is perfect, as the markets are undergoing what could be a generational change in investing behavior.

What Are Value And Growth Stocks? This can be answered with a simple definition that is synonymous with its label.

For the most part, “value” stocks (companies) actually make money on a consistent basis, sport a low or modest price-to-earnings ratio, have manageable debt and often pay a dividend.

Depending on the sector, issues in category trade at a price/earnings under or at a discount to the S&P 500 price/earnings ratio (22).

Ir should be noted that the index is now trading at a historically high forward price/earnings ratio.

AT&T (NYSE: T), Verizon Communications (NYSE: VZ), Pfizer (NYSE: PFE) and it peers and most utility companies in the S&P Select Utilities Spyder Fund (NYSE: XLU) are examples. 

Defining “growth” stocks is a bit more difficult. While some lose money, others can be profitable.

The key to these stocks is the trajectory of the growth. Investors in these issue are banking on strong earnings growth over time to validate the rising share price.

Related Link: Growth Is A Sell On Rallies, Value Is A Buy On Dips: PreMarket Prep

What Makes A Stock Growth Or Value? As stated above, it comes down to earnings growth and the expectation of earnings growth in the future.

The catalysts may vary across sectors. For example, a company like Peloton Interactive (NYSE: PTON) just needs to sell more and more exercise equipment and acquire more subscribers.

A biotech company may increase its growth in earnings with the approval of new drugs or by acquiring rivals and peers that are in a growth phase

When evaluating the pace of growth in any company, investors must determine whether the spike in growth is a one-off event (like the pandemic) or if it's sustainable under varying conditions.

The Easiest Way To Decide: We're being a bit repetitive, but it all boils down to the issue’s current price and pace of earnings growth.

One of the biggest mistakes a new growth investor can make is to get fooled by the price action. For example, Zoom Video Communications (NYSE; ZM) has almost been cut in half from its all-time high ($588.64) at $294.

While the price may be cheap on a relative basis, the company still trades at a bloated forward price/earnings ratio of 91, which is still extremely high.

The full discussion on this topic from Thursday’s show can be found here:

 

Related Articles (PFE + PTON)

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