Growth investing and value investing. These two terms are thrown around quite a lot in investment circles and can be quite confusing for those who are just starting out. In this article, I’ll attempt to demystify the terms as well as provide actionable FTSE 100 stock picks that I would buy using each approach.
Value investing: the long game
Value investing is kind of the bargain hunters’ approach to investing. There’s probably no greater lover of a good bargain-but-high-quality stock than Warren Buffett. He and his early mentor, Benjamin Graham, embraced and popularised this style of investing and it has since made both of them and countless others, fabulously wealthy.
So, what’s it all about? Well, imagine I go to an auction where a rare Rolex watch is being offered. For some reason, the other potential buyers don’t see as much value in the watch as I do. As a result, they don’t make any substantial offers or bid up the price and I get the watch at a slight discount to what I think is its true value. Some 30 years later, the watch is rarer than ever and the market is now well aware of its value. I sell it for 200 times what I bought it for. That’s value investing in a nutshell.
It’s all about buying high-quality companies for a discount to their true worth. Buffett actually goes into the transaction with the mindset that he is not only buying a piece of the business but the entire business. Accordingly, his mental framework is always to hold for the long term. Value stocks are characterised by the lower risk afforded by the underlying quality of their companies.
Some notable FTSE 100 picks I see as value stocks are companies like Tesco and Rio Tinto. They have low price-to-earnings ratios of 3.37 and 5.66 respectively. This is despite both companies having a long history of positive earnings and a strong market presence. So in my opinion, they are trading below their fair value and I would buy them.
Growth investing: high risk, high reward
Growth investing is simply a bet on potential. Such companies are often young and often have little or no proven track record of being consistent money-maker (although this isn’t always the case). They are often from emerging industries such as tech or renewable energy and therefore come with a lot of hype. This brings lots of market attention and therefore they often trade at high valuations because of their popularity.
When a growth stock succeeds, it can be spectacular from a returns perspective. Amazon is one such example of a growth stock that exploded and produced huge returns. However, due to the uncharted nature of the territory they operate in and high capital expenditures associated with new product R&D, these companies can also fail spectacularly.
One FTSE 100 company that falls within the growth category is Entain. It operates as a high-tech pioneer of new technologies in the gambling and gaming industries. Entain is profitable but has a P/E ratio of 72. I have previously said that I would buy Entain and still would.
The post Value and growth stocks: my top picks from the FTSE 100 appeared first on The Motley Fool UK.
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Stephen Bhasera has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.