Growth vs. Value Investing—Sidhavelayutham, Alice Blue Founder & CEO

Bangalore : It is a tough choice for any investor to choose between value investing and growth investment. One may chose either, but the purpose of these two opposing schools of thought is the same. The ultimate goal is to create greater returns on invested money over a certain time period. Since World War II (1939-1945), value investment has mostly been a steady winner on a worldwide basis. However, underperformance may be shown from 2007 to 2020. In reality, the period from 2018 to 2020 in the Indian stock market belongs to growth stocks.

Growth companies have a high P/E ratio and produce more EPS growth than the typical industry or market EPS over time. Every investor desires a piece of stock in which the company’s future development potential is much greater than that of other participants in the industry. Furthermore, these companies tend to do very well when the RBI lowers interest rates, since this boosts corporate profitability. However, there is always the potential of massive capital loss owing to unexpected poor news or results from the firm. As a result, understanding how much of the effect is priced in the stock is critical for every investor. According to well-known worldwide investor Howard Marks, “any asset is an excellent asset at the right price.”

Take, for example, Varun Beverages. If one analyzes the period from Dec 2017 to Dec 2022, the revenue of the company has grown from Rs. 4000 cr annual revenue to above Rs. 13000 cr in Dec 2022. That’s a huge jump of 229%. In fact, if you look at the bottom line, it was just 214 cr in Dec 2017, and now the figure has crossed `1500 cr in Dec 2022. It is a 7x jump. An era of significant growth, but what about the stock price? It was trading at around Rs. 100 in Dec 2017, the stock reached nearly Rs. 700 in Dec 2022 and is currently trading at Rs. 830. There is no stopping this growth-based multi-bagger stock. However, if there is any impact on its relationship with PepsiCo, the stock might just tank from its peak.

Value investing is the art of buying undervalued stocks trading at a lower valuation and selling it at the forecasted intrinsic value. The lower the P/E and P/B ratios for these stocks, the better it is for investors. Additionally, these stocks have a much higher dividend yield as compared to growth stocks and are relatively less volatile. The cash flow estimation is also highly reliable as compared to the growth stocks.

Now, if you look at Ircon International, a year back, the stock was trading at a P/E of 5.7x. Railways as a sector were underperforming over this time. However, conventional businesses like these, including power, started to outperform other sectors due to Govt’s focus on improving the railway infra of the nation. The stock is now trading at a P/E of 12.5x. Talking about the stock movement, it was around Rs. 40 in Sept 2022, and now it is above Rs. 100, along with a dividend yield of around 2.5%. That’s value investing, when you identify an undervalued stock and sell when it reaches its intrinsic value.

One needs to understand that no investing style works forever. It is the situation analysis that an investor needs to do before choosing one. It is always advisable to make a combination of both styles as it generates higher returns at lower risk with diversification benefits. The risk profile of the investor is also equally important to judge in this scenario. In fact, a stock can evolve over a period of time from a value stock to a growth stock and vice-versa.

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