Growth Stocks Versus Value Stocks: Where’s The Bargain?
Is it time to hunt for bargains in the stock market? And if so, are growth stocks cheap enough to buy?
It’s been a brutal start to the year for many investors. And that’s especially true if you’ve held big positions in many of the growth stocks that were so popular during the post-pandemic bull market.
So far this year, growth stocks — as measured by the Vanguard Growth ETF (VUG) — are down 13.5%. And that’s after a rebound over the last few trading sessions.
Meanwhile, value stocks — as measured by the Vanguard Value ETF (VTV) — are only down 1.7%.
Following such a sharp decline, it may seem like growth stocks have the best shot at rebounding from this level. And there are some great opportunities that I’ve been watching in this area.
But as a group, growth stocks still could have a long way to fall before they become “cheap.” After all, many of these stocks spent 18 months or more climbing steadily higher as an army of novice investors jumped in to momentum plays regardless of underlying fundamentals.
In today’s turbulent market, it’s more important than ever to look at what you actually get for the cash you invest. In other words, how much do you have to pay for every dollar per share a company generates.
The “forward price/earnings ratio” is one of my favorite tools for determining whether a stock is attractive or not. This ratio tells us how much we’re paying for ever dollar a company is expected to earn over the year ahead.
When you consider this number, alongside the expected long-term profit growth of a company you’re interested in, you’ll be able to understand which stocks are very expensive and which ones may actually be more of a bargain.
Growth Stocks are Still Too Expensive
This morning, I came across a very interesting chart from BCA Research.
The top section shows how much more investors are paying for growth stocks compared to what they pay for value stocks.
Even though the chart has pulled back this year (thanks to the selloff in growth stocks), these “exciting” investments are still significantly overvalued.
This tells us that growth stock could still have much farther to fall.
Another possible scenario is that growth stocks could stall out and trade in a range, while value stocks steadily rise in price.
Either way, the current advantage goes to investors who look more carefully at the fundamental profits for companies they invest in. Being picky about what you buy, and what you’re willing to pay can help to reduce your risk and grow your profits over the long run.
For my own trading models, I’m making bullish bets on real companies with reliable profits. And I’m also buying select put contracts (bearish bets) on stocks that are still expensive compared to what they earn — that is IF they earn any profits at all!
Be careful out there… We’ve still got a long way to go before it’s safe to buy speculative growth stocks again.