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Difference between Growth stocks and Value stocks
Growth stocks are associated with high-quality, successful companies whose earnings are expected to continue growing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios.
What is the meaning of P/E ratio
The market participants often places a high value on growth stocks; therefore, growth stock investors also may see these stocks as having great worth and may be willing to pay more to own shares.
Investors who purchase growth stocks receive returns from future capital appreciation (the difference between the amount paid for a stock and its current value), rather than dividends. Although dividends are sometimes paid to shareholders of growth stocks, it has historically been more common for growth companies to reinvest retained earnings in capital projects.
Recently, however, because of tax-law changes lowering the tax rate on corporate dividends, even growth companies have been offering dividends.
Growth stocks are less prone for market fluctuations and provide stable returns year after year.
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HIGH P/E ratio stocks
To know the HIGH price-to-book ratio stocks please visit page -
HIGH price-to-book ratio stocks
At times, growth stocks may be seen as expensive and overvalued, which is why some investors may prefer value stocks, which are considered undervalued by the market. Value stocks are those that tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). Value stocks generally have good fundamentals, but they may have fallen out of favor in the market and are considered bargain priced compared with their competitors.
They may have prices that are below the stocks’ historic levels or may be associated with new companies that aren’t recognized by investors. It’s possible that these companies have been affected by some problem that raises some concerns about their long-term prospects.
Value investing is different, and involves picking out shares that are priced below their intrinsic value.
Value stocks generally have low current price-to-earnings ratios and low price-to-book ratios. Investors buy these stocks in the hope that they will increase in value when the broader market recognizes their full potential, which should result in rising share prices. Thus, they hope that if they buy these stocks at bargain prices and they eventually increase in value, they potentially could make more money than if they had invested in higher-priced stocks that increased modestly in value.
Value stocks mostly move with market fluctuations so returns are almost volatile. Such stocks may provide excellent returns in one year and possibility of providing zero returns next year.
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LOW P/E ratio stocks
To know the LOW price-to-book ratio stocks please visit page -
LOW price-to-book ratio stocks
- Though price-to-earnings (PE) and price-to-book value (PBV) ratios are favourite tools of value investors. But a low PE or PBV alone does not guarantee a value stock. Many PSU banks, high debt companies and real estate companies are trading below their book value but necessarily they do not become a value stock for investment.
So what else need to be considered with P/E and P/B ratios?
From below filters, the more filters you apply the best value stock for investment will
1. Stocks with a PE of lower then 20 need to be selected
2. Another valuation metric is the price to book value (PBV). The PBV can vary greatly,
so keep a liberal cut off of 5.
3. Select companies that have consistently generated profits in the past five years
4. Select companies having registered at least a 10% annualised growth in net profit
during 5 years
5. Select only those companies with a positive operating margin.
6. Also, companies with a very high level of debt can be risky. So, all companies with a
debt-equity ratio of more than 2 needs to be avoided.
7. Only stocks with at least 10% ROCE (return on capital employed).
8. The RONW (return on net worth) should be at least 15% to ensure that only
companies generating enough profits
9. Stocks that paid dividends in the past five years and distributed at least 10% of their
profits as dividend
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