Growth vs. Value Stocks: What's the Difference?
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Hearing investing moguls talk about the fate of growth or value stocks only has meaning if you know the difference between the two. Ark Invest founder Cathie Wood thinks growth stocks will perform poorly into 2022, which may or may not be true.
With so many publicly traded companies to choose from in the US markets, opinions from Wood and others aren't always the important thing. What really matters is knowing your stuff—including what growth and value stocks are—so you can build an investment strategy that resonates.
First and foremost: What are growth stocks?
Growth stocks get their name honestly. They're stocks that experts consider to have the potential to grow over time. Investors tap growth stocks in the hopes they will outperform the market average over time thanks to potential future company growth.
What about value stocks?
Legendary investor and Berkshire Hathaway (NYSE:BRK.B) founder Warren Buffett has been vocal about his support for value stocks over the years.
"It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price." - Warren Buffett
A value stock is a stock that's considered to be undervalued at its current market price.
The real difference between growth and value stocks
Because growth stocks have room to grow, they tend to be smaller, younger companies. On the contrary, value stocks tend to be larger, more established brands.
Technically, analysts consider both growth and value stocks to be undervalued at their current price. However, growth stocks are rooted in a company's potential because of its value proposition, whereas value stocks are based on a company's books.
What to know about value and growth stocks before investing
Value stocks can become undervalued for a number of reasons, so it's important to look at why the company is undervalued before investing. Is it because of an executive scandal, a lawsuit, public perception, subpar earnings, or another reason? If there's a good chance the stock will recover, it could be a solid entry point.
Meanwhile, growth stocks are based on a company's potential. Anything from a black swan event (like COVID-19) to unexpected business failures can change a company's fate before it gets a chance to thrive.
Growth stocks vs. value stocks: Examples in the US stock market
Amid the late-September selloff in the US stock market, plenty of stocks are undervalued.
According to analysts, value stocks right now include Lowe's (NYSE:LOW), Posco Steel (NYSE:PKX), Honda Motor (NYSE:HMC), Royal Dutch Shell (NYSE:RDS-A), PG&E (NYSE:PCG), and Solar Winds (NYSE:SWI).
According to analysts, growth stocks right now include Okta (NASDAQ:OKTA), Tesla (NASDAQ:TSLA), Palantir Technologies (NYSE:PLTR), DraftKings (NASDAQ:DKNG), Teladoc (NYSE:TDOC), and Shopify (NYSE:SHOP).
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