Over the last 10 years, our data shows that growth investing has convincingly beaten value investing. But will things change in 2023 with the lack of cheap financing and stimulus?
The great debate in stock picking is value vs. growth investing. The terms value and growth represent radically different investing styles and philosophies. The difference in investment styles is best examined by what investors buy. Value investors buy companies, while growth investors buy stocks.
A value investor hopes to find companies that will make enormous amounts of money for many years to come. A growth investor wants to make money when the stock price grows.
Growth investors focus on share prices, market capitalizations, and stock performance. Value investors focus on corporate performance. Growth investors will read stock charts and analyst ratings, while value investors read financial reports.
Value Stocks vs. Growth Stocks
Growth stocks have beaten value stocks over the last 10 years. Our research reveals that value stocks have not performed as well as growth stocks, lagging the S&P 500 index by at least 70%. The value stocks held by Berkshire Hathaway and the Berkshire Hathaway stock value have lagged the S&P 500 by over 100%.
Value Stocks vs. Growth Stocks Performance
Our research on Value Stock strategies vs. Growth Stock strategies shows a clear difference over 10 years to December 2020. The S&P 500 has increased a dividend-adjusted 311%, while Berkshire Hathaway has underperformed with a 247% gain, and Berkshire Hathaway’s top 25 holdings have only increased by 204%.
To compare growth stocks’ performance vs. value stocks, we charted the 10-year gains in the following stocks & indices.
- Nasdaq 100 Index +523%: The Ultimate Growth Index
- S&500 Index +311%: The 500 Largest Capitalized Companies in the USA
- Berkshire Hathaway (BRKB) +247%
- Berkshire Hathaway’s 25 Largest Holdings +204%: Value Stocks
Value Funds vs. Growth Fund Performance
Further research demonstrates that Growth Stocks on a dividend-adjusted basis have significantly outperformed value stocks. This is also true for value funds, which have significantly lagged behind the Nasdaq 100 by more than 200% over 10 years.
Table 1. Value & Dividend Funds Lag the S&P500 & Nasdaq 100 on a 5 & 10-year basis.
|Fund/Index||Company||5-Year Return vs. S&P 500||10-Year Return vs. S&P 500|
|Nasdaq 100||NASDAQ 100 index||83.00%||266.10%|
|QQQ||Invesco QQQ Trust||82.60%||261.00%|
|VUG||Vanguard Growth Index Fund ETF Shares||42.90%||94.30%|
|VTV||Vanguard Value Index Fund ETF Shares||-32.10%||-70.60%|
|SCHV||Schwab U.S. Large-Cap Value ETF||-36.60%||-84.60%|
|DVY||iShares Select Dividend ETF||-44.30%||-87.60%|
|IWX||iShares Russell Top 200 Value ETF||-41.30%||-94.70%|
Warren Buffett’s View on Value & Growth Stocks
Growth investors need to pay attention to Berkshire Hathaway because Buffett is a growth investor too. “Growth and value investing are joined at the hip,” Buffett once said. Buffett believes a good value stock needs growth.
Buffett seeks growth stocks because growth adds a margin of safety. Without growth, inflation will destroy a company’s cash and assets over time. Buffett thinks no stock can preserve its value without revenue and share value growth.
Buffett shows there need be no conflict between growth and value stocks or dividend and growth stocks. Any investor can be a dividend investor because there are growth and value stocks that pay dividends.
Any investor can be a growth investor because there are growth stocks with value characteristics. Alphabet and Amazon are companies with long histories of growth that have enormous amounts of cash. Amazon (AMZN) had $68.402 billion in cash and short-term investments on September 30, 2020.
Buffett considers cash one of the most important value characteristics. Some people will consider companies such as Facebook (FB) and Amazon (AMZN) will consider value stocks because of the cash. Facebook had $55.620 billion in cash and short-term investments on September 30, 2020.
Some people do not consider Amazon a value investment because of its high share price. Mr. Market paid $3,220.08 for Amazon shares on December 1, 2020. These investors believe a value stock must be cheap.
Warren Buffett, however, thinks a value stock can be high-priced. Buffett told CNBC that Berkshire Hathaway owned 483,000 shares of Amazon in May 2019. Buffett also admitted that not buying Amazon earlier was a mistake.
Buffett shows the line between value and growth stocks is blurred. A growth stock can be a value stock.
Styles of Investing
Growth investing is associated with technology stocks and new industries that grow fast. Growth investors buy tech stocks because they historically grow fast. Many growth investors will ignore corporate performance metrics such as revenues, income, cash flow, assets, and gross profit. The growth investors focus on the company’s rate of growth instead.
What is a Growth Stock?
The ultimate objective of growth investing is to sell the stock at a higher price. Growth investors seek the next Amazon (AMZN) or Tesla (TSLA), a company with a high share price.
Tesla is a classic growth stock because it has a high share price and a history of not making money. Investors paid $567.60 for Tesla shares on December 31, 2019. Yet Tesla reported an annual net loss of -$775 million for 2019.
In 2020, Tesla’s (TSLA) share price grew from $86.05 on January 2, 2020, to $567.50 on November 30, 2020. Tesla is a growth investors’ dream stock because its share price grew fivefold in 2020.
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What is a Value Stock?
Value investors seek cheap stocks in companies that make money. An example of a value stock is Ford (F), the American automaker. Mr. Market paid $9.08 for Ford on November 30, 2020.
Ford reported a quarterly gross profit of $6.278 billion and $37.501 billion in quarterly revenues on September 30, 2020. Value investors buy Ford because they think it will generate enormous amounts of money next year.
Ford reported $44.831 billion in cash and short-term investments and total assets of $259.943 billion on September 30, 2020. Value investors will say Ford has enormous amounts of value.
Growth investors will call Ford (F) a “value trap” because it offers scant share value growth. A value trap is a company with no hope of share price growth that has enormous theoretical value.
Dividend vs. Growth Investing
Many people confuse growth investing with dividend investing. Dividend investors seek stocks that pay dividends.
Many dividend investors buy stocks with high revenue and income growth rates because they think those companies will have the money to pay high dividends at some point. Some dividend investors buy companies such as Alphabet (NASDAQ: GOOG) and Amazon (AMZN) because those companies generate enormous amounts of cash.
Alphabet (GOOGL) reported $132.596 billion in cash and short-term investments on September 30, 2020. Yet Alphabet famously pays no dividend.
Some dividend investors hope events will force Google to pay a dividend someday. These investors note that Apple (AAPL) started paying dividends again in 2012 after 18 years. Apple stopped its first dividend in November 1995 and launched a new dividend in August 2012.
Apple paid an 82₵ quarterly dividend on August 13, 2020, which fell to 20.5₵ on November 12, 2020. Apple reported $90.943 billion in cash and short-term investments on September 30, 2020.
Growth investors will note that Mr. Market paid $119.05 for Apple and $1,754.40 on November 30, 2020. The difference between growth and dividend investors is that growth investors look at the share price, and dividend investors watch the dividend or potential dividends.
Many dividend investors ignore companies such as Amazon (AMZN), Berkshire Hathaway (BRK.B), Alphabet (GOOGL), and Meta (FB) which have historically paid no investment.
Growth investors will consider Alphabet, Facebook, and Amazon as good stocks because of their high revenue growth rates. Value investors love Berkshire Hathaway (BRK.A) because it generates enormous amounts of value. Berkshire Hathaway had $26.817 billion in cash and short-term investments on September 30, 2020.
Dividend investors buy stocks only for the dividend, while growth investors buy stocks with the hope of a higher price of selling them for a higher price in the future. Some growth investors will buy dividend stocks to get some money soon.
Classic dividend investors regard dividends as a margin of safety by providing some income. There are also value investors who seek value stocks that pay dividends to generate income now.
Berkshire Hathaway CEO Warren Buffett famously hates paying dividends but loves receiving them. Berkshire Hathaway (BRK.B) does not pay dividends, but 36 of the 52 stocks and exchange-traded funds (ETF) Berkshire Hathaway owned in March 2020 paid dividends.
Buffett shows value investors can be dividend investors. Berkshire Hathaway buys value stocks that pay dividends.
Whether Investing For Growth, Dividends or Value, Stock Rover is the Perfect Partner
Growth Stock Examples
Growth stocks abound in today’s stock market. To help you find them, here are a few examples.
NIO (NYSE: NIO)
Many people think this Chinese electric carmaker could be the new Tesla (TSLA).
NIO is still a startup that only sells vehicles in China though it has offices in Europe and California.
NIO’s production is tiny when compared to Tesla’s. Statista estimates Tesla delivered 139,300 vehicles in the 3rd quarter of 2020 and 112,000 vehicles in the 4th Quarter of 2019. In contrast, NIO delivered 12,206 vehicles in the 3rd Quarter of 2020, 10,331 vehicles in the 2nd Quarter of 2020, 3,838 in the First Quarter of 2020, and 8,224 vehicles in the 4th Quarter of 2019.*
NIO (NIO) loses money. The company reported a negative annual gross profit of -$172.20 million and a negative annual operating income of -$1.591 billion for 2019.
Many growth investors bought NIO because its share price grew from $4.70 on June 2, 2020, to $45.92 on December 2, 2020. NIO is an example of a pure growth stock; an equity people buy only for its growth potential.
People who need income from stocks need to avoid NIO because they lose money and pay no dividends.
Netflix (NASDAQ: NFLX)
Netflix (NFLX) is one of the world’s most popular growth stocks. The streaming service’s share price grew from $130.93 on December 4, 2015, to $505.67 on December 2, 2020.
I think revenue growth is the attribute that attracts investors to Netflix. Stockrow estimates Netflix’s revenues grew at a rate of 22.70% in the quarter that ended on 30 September 2020.
The theory is that Netflix’s revenue growth will lead to enormous amounts of cash. Netflix’s financial numbers support the theory; Netflix reported a quarterly operating cash flow of $1.2634 billion and a quarterly ending cash flow of $1.242 billion on September 30, 2020.
Netflix had $8.392 billion in cash and short-term investments on September 30, 2020. Netflix’s cash and short investments grew from $5.018 billion on December 31, 2019. Netflix’s value also grew in 2020. Netflix’s total assets grew from $33.976 billion on December 31, 2019, to $38.623 billion on September 30, 2020.
Netflix is a good example of a cash-rich growth stock. It has taken years for Netflix (NFLX) to generate that cash. I think Netflix is a poor stock for ordinary people because it pays no dividends.
NVIDIA Corporation (NASDAQ: NVDA)
The chipmaker NVIDIA (NVDA) is a growth stock with many value-stock characteristics that pay a dividend.
NVIDIA’s share price grew from $33.75 on December 4, 2015, to $544.62 on December 2, 2020. Stockrow estimates NVIDIA’s revenues grew by 56.80% in the quarter that ended on October 31, 2020.
NVIDIA generates enormous amounts of cash, despite the share price. NVIDIA reported a quarterly operating cash flow of $1.279 billion on December 31, 2020. NVIDIA reported a quarterly ending cash flow of $15.494 billion on April 30, 2020.
The quarterly ending cash flow fell to -$1.03 billion on October 31, 2020. NVIDIA (NVDA) had $10.139 billion in cash and short-term investments on October 31, 2020.
NVIDIA’s value has grown dramatically. NVIDIA’s Total Assets grew from $17.315 billion on January 31, 2020, to $26.881 billion on October 31, 2020.
NVIDIA is an example of a growth stock with growing cash and values. I think NVIDIA is a good growth stock for ordinary people because it pays dividends. NVIDIA will pay a 16₵ dividend on December 29, 2020. NVIDIA had an annualized dividend of 64₵ and a dividend yield of 0.12% on December 2, 2020.
NVIDIA shows that growth stocks can be good overall stocks because of the growth, cash, and dividends.
Zoom Video Communications Inc. (NASDAQ: ZM)
Zoom’s share price grew in 2020 because its business is undergoing explosive growth.
The video meeting service’s daily active users (DAU) grew from 10 million in December 2019 to 300 million in April 2020, Business of Apps estimates. The coronavirus pandemic drives Zoom’s explosive growth.
Zoom’s revenues grew by 355.01% in the quarter that ended on July 31, 2020, Stockrow estimates. Stockrow estimates Zoom’s quarterly revenue growth rose from 169.02% on April 30, 2020, and 77.93% on January 31, 2020.
Investors took notice of Zoom’s growth. Zoom (ZM) shares began trading at $62 on April 18, 2019. By December 2, 2020, Mr. Market was paying $410.41 for Zoom shares.
Zoom makes small amounts of money. Zoom reported an operating income of $10.55 million on January 31, 2020. The operating income grew to $188.10 million on July 31, 2020, however.
I consider Zoom an example of a theoretical growth stock. Zoom is a company that could make enormous amounts of someday.
People think Zoom will make money because its cash flows are growing. Zoom’s quarterly operating cash flow rose from $36.55 million on January 31, 2020, to $401.35 million on July 31, 2020, for instance. Zoom’s ending cash flow grew from $52.25 million to $273.33 million in the same period.
I do not think the cash flow numbers justify Zoom’s share price. I think Zoom’s share price could collapse because investors notice the difference between the share price and the cash flow.
I think Zoom shows one of the great dangers of value investing. The company’s actual value does not justify the incredible share price growth. Zoom’s stock could collapse fast because there is no way to tell if the video platform’s growth is sustainable.
Growth vs. Value ETFs and Funds
A growth ETF is an exchange-traded fund built around a portfolio of growth stocks. The thinking behind growth ETFs is that growth stocks offer more security and higher long-term returns than value or dividend funds.
Managers build a value ETF around a portfolio of value stocks. The hope is that the value stocks will be cheaper and pay a higher return than growth stocks.
Many people believe that value ETFs can be safer than growth funds. Because growth stocks are a more speculative investment, some growth investors will contend that growth ETFs are safer because their moneymaking capacity will not shrink in the future.
A common criticism of value stocks is that older industrial stocks serve shrinking markets and have no future. Growth stocks, in contrast, serve a growing market so they could have a better future.
Today’s market offers many growth ETFs. We will examine two of the best-known growth ETFs to show you what to seek in a growth index fund.
Invesco QQQ Trust Series 1 (NASDAQ: QQQ)
They base the Invesco QQQ on an index of the top 100 non-financial shares on America’s NASDAQ stock exchange. The NASDAQ stock exchange is the home of many tech stocks, including Silicon Valley giants such as Apple (AAPL) and Facebook (FB).
Invesco claims the QQQ is the fifth-largest ETF. In the last decade, QQQ’s share price grew from $53.87 on December 3, 2010, to $305.12 on December 4, 2020.
Many people buy the QQQ because it contains some of the biggest tech stocks in America, including NVIDIA (NVDA), Facebook (FB), Alphabet (GOOG), Tesla (TSLA), Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL).
The QQQ shares paid a 39₵ dividend on October 30, 2020. That dividend fell from 8.9₵ on July 30, 2010.
Vanguard Growth Index Fund ETF (NYSEARCA: VUG)
The Vanguard Growth Index (VUG) tracks the CRSP US Large Cap Growth Index. The Center for Research in Security Prices (CRSP) Large-Cap Growth Index contains many of America’s largest growth stocks.
The Vanguard Growth Index (VUG) contains both financial and technology stocks. The VUG’s largest holdings include Home Depot (HD), Mastercard (M), Visa (V), NVIDIA (NVDA), Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL). The VUG’s major focus is consumer discretionary stocks.
The Vanguard Growth Index’s share value grew from $60.52 on December 3, 2020, to $247 on December 4, 2020. The VUG paid a 41.9₵ dividend on June 30, 2020; the dividend grew from 14.9₵ on June 30, 2020.
Managers design value exchange-traded funds to lessen the dangers of value stocks through diversification. One purpose of value ETFs is to help investors avoid value traps.
A value trap is a stock with value characteristics that loses money. The best value ETFs limit the value risks by investing in an index of value stocks. Here are two excellent ETFs around to give you an idea of what a good value ETF will look like.
The iShares Select Dividend ETF (NASDAQ: DVY)
The iShares ETF (DVY) tracks an index of 100 US stocks with five years of paying dividends.
The advantage of the DVY is that it tracks lesser-known value investments many people are unfamiliar with. Another advantage to the DVY is that it combines the attributes of dividend and value stocks.
The DVY’s key holdings include the Altria Group (MO), Prudential Financial (PRU), International Paper (IP), Wells Fargo (WFC), Marathon Petroleum (MPC), Philip Morris International (PM), and ViacomCBS Class B ( VIAC).
The DVY’s share value grew from $49.62 on December 10, 2010, to $97.54 on December 4, 2020. The iShares Select Dividend ETF quarterly dividend grew from 42.2₵ on September 29, 2010, to 94.6₵ on September 29, 2020.
The iShares Select Dividend ETF is excellent because it offers both growth and dividend income.
The Utilities Select Sector SPDR Fund (NYSEARCA: XLU)
The Utilities Select Sector SPDR Fund (XLU) tracks an index of American energy utilities. The XLU’s largest holdings include NextEra Energy Inc. (NEE), the Duke Energy Corporation (DUK), and the Southern Company (SO).
The XLU’s share value grew from $31.28 on December 3, 2010, to $62.41 on December 4, 2020. The XLU dividend grew from 31.7₵ on September 10, 2010, to 49.9₵ on September 24, 2020,
The attraction of the Utilities Select SPDR is that it offers a steady income with limited risks. Many people invest in value ETFs such as the XLU Spider because they invest in industries such as utilities that are not glamorous. The hope is that less glamorous industries will be more stable and less risky. The drawback is limited growth.
In the final analysis, both value and growth investing offer advantages. Value investing offers safety and steady income, while growth investing offers the prospect of more money in the future. Smart investors will understand both strategies and chose the one that is best for them.
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