Looking for growth and value is a winning combination.
First off, Growth Investors focus on companies with great earnings growth. And this makes sense since earnings drive prices. But nobody wants to overpay for good growth.
Value Investors focus on low valuation metrics like low P/Es for example. But many companies have low P/Es because they don’t have any real growth to speak of. They lack earnings power. And people aren’t willing to pay up for these stocks because there’s nothing to pay up for.
But looking for both growth and value is a great combination and helps alleviate the pitfalls of having one but not the other.
But I believe there’s a right way and wrong way to find both growth and value stocks.
Wrong Way (How Most Search for Growth and Value)
Most will start off with either one or the other. Like looking for stocks with biggest growth rates first and then narrowing those stocks down to the ones with the smallest P/E ratios.
But if the biggest growth rate stocks all had high P/E ratios (let’s say in excess of 20 or more for example), are you really finding the best of the value stocks? The answer is no. You’re only finding the growth stocks with the lowest valuations – even though they may be quite high.
Likewise, if you first screened for the lowest P/E ratios, and then narrowed that list down to the ones with the biggest growth rates – if the lowest P/E stocks all had sub-par growth rates, you’d only be selecting the best of the sub-par growth stocks and not really getting both the growth and value you were looking for.
Some try to overcome this by plugging in classical metrics like P/E under 20 and growth rates over 20. But you’ll have a ton of stocks filling up that list and you’ll be digging thru a ton of average stocks, not the best of each category.
So how does one find these stocks the right way?
Right Way (How You Should Search for Growth and Value)
The right way is to focus on companies with the highest growth rates AND the lowest P/E ratios ALL AT THE SAME TIME.
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