Growth versus Value Stocks
Growth companies are those that are growing sales and earnings every year. Their stock prices are rsing, their profit margins are big, and their expectations are high.
Value companies are trading at low prices (relative to their intrinsic values). The low prices are usually the result of tough times at the company but occasionally just because the market is a weird place. Preferably, you buy a value stock just when it has fixed its troubles and begins to profit again, or just before the market discovers its discount price.
Often the best growth investments are smaller companies. Of particular importance in evaluating growth companies are high earnings record, high relative strength and low price-to-sales ratios. O'Shaughnessy found price-to-sales a great measure to mix with traditional growth yardsticks because it keeps growth investors from getting too carried away with emotion and paying too much for a stock.
The best value plays are usually large companies. Not always, but most of the time. Large companies don't change much and that makes them prime candidates for bargain pricing. They are not going anywhere, after all, so they have no choice but to recover from whatever trouble they're in. For such companies, traditional value measures will be your focus. Those are dividend yield, P/E, price-to-book, and price-to-sales.
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