Who doesn't love a sale? Combing through discount bins to find that one passed-over, underpriced item can be a thrill for some (especially those in the re-sale game)—and if you're a savvy investor, you can do it with stocks too.
Value investing is like speculative treasure hunting on the market, searching for an undervalued stock with the prospect of profitability. Value stocks tend to be shares of mature companies that have lost favour with investors for the time being, driving down demand and thus lowering the share price.
- Value investing is a long-term, steady growth approach to building wealth.
- The most successful value investor? Warren Buffet.
You can use a few metrics to determine a good value stock. If you answer yes to all three of these questions, it's likely the company has a record of consistent growth in earnings and cash flow:
- Does it have a low price-to-earnings ratio (PE)?
- Does the company have manageable debt levels?
- Does it pay out dividends?
While these metrics can help you identify a value stock, it doesn't guarantee a profitable outcome, as the shares may appreciate less than you estimated.
Growth stocks are the opposite—they are shooting star stocks investors hop on because they are betting that the growth trend in earnings or revenue will continue, appreciating faster than the market.
- Growth stocks tend to come from companies at the forefront of their industry or leaders of the pack in disrupting a sector. Think Big Tech.
- They have a higher PE, low or no dividend yields for investors, and are overvalued because everyone wants their share of the "next big thing."
The risk here is that growth stocks face higher volatility, so investors could overpay for shares.
Bottom line: RBC suggests that instead of choosing one over the other, use the growth at a reasonable price (GARP) model, where you carve out a middle-of-the-road approach to buying shares with good growth potential without paying too much for them.