Bret Kenwell
By Bret Kenwell

Boot Camp Day 5: Value Investing vs. Growth Investing

The Daily Breakdown analyzes the pros and cons between value investing and growth investing, helping investors understand what may suit them.

For those interested in other parts of the Fundamental Analysis Boot Camp, consider the following links: 

Quick TLDR

  • Value investing can be slow but rewarding
  • Growth stocks can pay off but be volatile

What’s Happening?

Today we’re talking about value investing vs. growth investing and how that fits into investors’ approach to the markets. 

Value Investing

Value investing is a long-term strategy centered on buying assets that appear to be undervalued. These companies may be out of favor with the market due to temporary issues, negative sentiment, or broader economic concerns, yet their fundamentals — like earnings, assets, or cash flow — suggest a higher worth. 

Investors like Warren Buffett have famously championed this method, using fundamental analysis to uncover mispriced opportunities. Some examples of past value stocks include: McDonald’s, Coca-Cola, and Johnson & Johnson. 

Pros to Value Investing:

  • Valuation: By purchasing seemingly undervalued assets, investors aim to limit downside risk if the market drops.
  • Stable Companies: Value stocks often represent well-established businesses with consistent cash flow and proven models. Sometimes these businesses are referred to as “blue-chip” stocks.
  • Dividends: Many value stocks pay dividends, which can help cushion returns during periods of market volatility, while adding to the stock’s total return over long periods. 

Cons:

  • Slower Capital Appreciation: Value stocks may take longer to recover or grow, testing investors’ patience.
  • Value Traps: Not all undervalued stocks bounce back — some suffer from structural declines that make recovery unlikely.
  • Market Sentiment: These stocks can remain undervalued for extended periods, especially if momentum-driven investing dominates.

Growth Investing

Growth investing targets companies expected to grow revenues, earnings, or market share at an above-average rate. These companies typically operate in innovative or rapidly expanding sectors such as technology, biotech, or clean energy. Investors focus less on current valuation metrics and more on future growth potential, betting that earnings growth will eventually justify the higher valuation. Some examples of past growth stocks include: Amazon, Netflix, and Nvidia. 

Pros  to Growth Investing:

  • Strong Upside Potential: If companies meet or exceed growth forecasts, investors may see significant capital gains.
  • Forward-Looking: Growth investing aligns with trends and innovation, allowing exposure to transformative industries.
  • Investor Appeal: These stocks tend to attract attention and capital, especially during bull markets, which can amplify returns.

Cons:

  • High Volatility: Growth stocks can be sensitive to earnings misses, interest rate hikes, or shifts in investor sentiment.
  • Premium Pricing: These companies often trade at high valuations, which can lead to sharp corrections if expectations aren’t met.
  • No Income Stream: Since profits are usually reinvested, investors receive little or no dividends, relying solely on share price appreciation.
  • Macroeconomic Sensitivity: Growth stocks can underperform during economic slowdowns or in rising-rate environments when future cash flows are discounted more heavily.

The Bottom Line

While value and growth investing represent distinct philosophies, many modern investors blend both strategies. The choice often depends on market conditions, risk tolerance, and investment time horizon. Periods of market rotation can favor one approach over the other, making diversification across styles a prudent strategy for many portfolios and amplifying investors’ ability to utilize both styles of investing.

Disclaimer:

Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.