By: Shaylon Godse and Ethan Zhang
Value investing is an investment strategy that involves buying stocks at a significant discount from their intrinsic value and holding them until the stock price rises as the market starts to appreciate the stocks true intrinsic value. Stocks often trade below their intrinsic value because they are underappreciated by the market, the market may not realize something about that fundamentally may affect their intrinsic value, or the market may overreact to bad news, resulting in stock price movements that do not correspond to companies’ long-term fundamentals.
When evaluating companies value investors look for businesses with strong value propositions, unit economics, economics moats, management teams, long runways for growth, and a reliable reinvestment strategy to deploy capital and capitalize on growth. Some auxiliary factors that value investors may consider for companies include their capital markets dependency, their exposure to extrinsic factors beyond the companies’ control, and the companies’ capitalization, the liquidity and leverage characteristics of the company, and any secular tailwinds and headwinds.
They also use a discounted cash flow (DCF) valuation models and sensitivity analyses to determine the intrinsic value of companies based on the present value of future cash flows and arrive at a target stock price. They then compare the target stock price to the current stock price to calculate the margin of safety for companies to determine if they have attractive valuations before making investment decisions.
Growth investing is an investment strategy that is typically focused on investing in start-ups or small companies that are expected to have significant growth in the future compared to their industry sectors. Growth investing aims at increasing an investor’s capital and is highly attractive to many investors as investing in emerging companies can provide impressive returns. However, growth investing is also often associated with high risk as start-ups and smaller companies usually do not have protections against unexpected downfalls such as bad earnings or in severe cases, bankruptcy. Still, growth investing offers a promising investment strategy to many investors, particularly those in the tech sector that are looking to invest in young and promising companies that could provide remarkable returns.
When evaluating a company’s value, growth investors usually look for five key factors: historical and future earnings growth, profit margins, returns on equity (ROE), and share price performance. However, there is no absolute formula in growth investing as the strategy also depends on various objective and subjective factors such as individual interpretation of the market environment, personal judgement and environmental influences.
An example of a growth stock is Tesla Inc. (TSLA). As the front runner in a rapidly growing EV industry, Tesla has made significant growth throughout recent years, aided by its stock split in August 2020. Its stock price and company growth also endured throughout the COVID-19 pandemic years as it captured an industry-leading 15.2% market share in the first half-year of 2021.