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Business
Growth stocks typically have higher price to book ratios, forecasted earnings growth rate, and price-to-earnings ratios than value stocks. They also generally pay little or no dividends where as value stocks pay higher dividends. This is a very basic definition of what a growth stock is compared to the value stock. Why are growth stocks valued higher than value stocks? The reason is that value stocks are seen to be out of favor compared to growth stocks. Also, growth stocks are anticipated or forecasted to have better earnings and revenue than value stocks.
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From a cyclical perspective, growth shares are priced at nearly a 40% discount to their longer-term relationship against value stocks. The four year duration of value out performance is matched only by the period from 1973-1976. The money that is allocated to growth mutual funds currently stands at the lowest percentage of total equity assets on record. The price to sales and the price-to-earnings ratios for growth and value stocks are starting to become more and more even. The premium historically placed on future revenues created by growth stocks would be labeled as a “value”. Another area that continues to concern me about value stocks, as a sector, is that financial stocks which make up roughly one third of all value stocks are starting to experience poor performance because of increases in interest rates.
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