When an investor tries to find “value” with an investment purchase, there are usually two ways to do it. The first involves buying growth stocks. Here, the advantage is that the earnings per share growth rate will be greater than the S&P 500 for an extended period of time. The second involves buying value stocks. The advantage with these types of stocks is the knowledge that you’re getting a deal, and even moderate growth can deliver strong returns when coupled with P/E ratio expansion.
The downside of growth investing is that attractive businesses often trade at P/E ratios that are a bit higher than what some investors are comfortable paying, and the downside of value investing is that the discount in price is often tied to some type of ongoing problem with the business operations that may take years for the valuation to correct (because usually it takes at least … Read the rest of this article!