Investment Fundamentals:

Understanding Growth and Value Investing

by Mitchell J. Smilowitz, CPA

If you invest in stocks, it’s important to understand the difference between Growth and Value investing. This article defines these terms, reviews some of the pros and cons of each approach, describes how you might combine them to create a diversified portfolio and identifies the JRB investment options that reflect each style.

Growth and Value Investing Defined

A mutual fund that takes a growth approach focuses on capital appreciation. (Capital appreciation is a rise in the value of a company’s stock. It occurs when the stock commands a higher price than the investor originally paid.) Fund managers look for companies that have experienced – or have the potential for – above average increases in revenues and earnings compared to others in its industry or the overall market. Growth companies often are fast-growing and higher-risk. This combination can make a growth strategy more volatile than a value strategy. The technology and telecommunications sectors, for instance, are full of growth companies.

Growth companies often have one-or-more of the following characteristics. They serve large and expanding markets, appear to have a durable competitive advantage and have a track record of growth.

A mutual fund that takes a value approach invests in companies that appear undervalued by the marketplace. Value fund managers look for companies that have good fundamentals but can be purchased for a discount. Value investments often have high dividend yields and/or lower price-to-earnings (P/E) ratios than other companies in its industry. These tend to be larger, blue-chip companies and/or companies found in cyclical industries such as raw materials (copper, iron and energy), transportation (automobiles and airlines) and discretionary consumer goods (clothing and entertainment).

Companies can be undervalued for several reasons such as unrecognized potential or a marketwide stock sell-off. Fund managers use a wide variety of analytical tools to identify undervalued companies. Value stocks are often found in parts of the market that are underperforming.

Because these stocks are undervalued, the stock price may fluctuate less and carry less risk than the broader market. Even if company stock prices do not increase, a value investor may benefit from dividend payments.

Growth and Value Pros and Cons

Growth funds generally have the potential to perform better when interest rates are falling and company earnings are rising. At the same time, growth funds may decline more when the economy cools and the market slides. In other words, the potential for higher returns comes with greater downside risk.

Value stocks may do well during an economic recovery, particularly early on, but are more likely to lag in a sustained bull market. Dividends from value companies may shelter an investor during market downturns.

Blend Funds

Blend funds invest in both growth and value stocks. Managers of blend funds look for companies that show consistent growth and strong value fundamentals.

Investing carries risk. But understanding the difference between value and growth investing can improve your ability to choose investments that allow you to balance your need for returns with your comfort with risk. Please contact us at staff@jrbcj.org or 888-JRB-FREE (572-3733) to explore how these concepts apply to your portfolio.

JRB Growth Funds

• Fidelity Contrafund
• Goldman Sachs Small/Mid Cap Growth R6

JRB Value Funds

• JPMorgan Equity Income Select
• T. Rowe Price Mid-Cap Value
• Fidelity Low-Priced Stock

JRB Blend Funds

• T. Rowe Price U.S. Equity Research
• Fidelity 500 Index
• Fidelity Extended Market Index
• Loomis Sayles Small Cap

June 2018