US Stocks: All about value investing in a bear market | The Financial Express

US Stocks: All about value investing in a bear market

Over the long run, growth stocks occasionally outperform value companies, but there are decades or periods where value stocks do better.

US Stocks: All about value investing in a bear market
As an investor, holding a diversified portfolio with a judicious mix of growth and value stocks is better than relying entirely on anyone.

Buy low, sell high remains a time-tested investing mantra in the stock market. But, easier said than done, there are multiple other factors at play that determines the long-term trajectory of a stock. In the selection of the right stock, there’s often a conundrum between growth and a value stock. The difference between the two is huge and could play a big role in the process of becoming rich by investing in the stock market.

Investors value a firm more highly when they consider its potential for expanding revenues and cash flow multiples in the future, which makes it a growth stock. Value investing, on the other hand, is when investors take into account a company’s future prospects while undervaluing its past performance. A value stock would often have an illustrious past but may lack market interest at the moment due to a number of fundamental reasons.

Over the long run, growth stocks occasionally outperform value companies, but there are decades or periods where value stocks do better. Growth company prices soar when times are good, but the fall is also swift, and many investors could lose a sizable amount of money in them. Value stocks have a limited downside because they have already reached their multi-year low.

Of the many fundamental parameters, one is the price-to-earnings (P/E) multiple that labels a stock as a growth or a value stock. When the market is willing to give a company’s stock a higher multiple, it’s precise because the market expects the company to keep growing in generating higher earnings. Price/Sales, Price/Cash Flow, Price/Book, EV/EBITDA, and shareholder yield are some of the other parameters along with the P/E Ratio to evaluate whether a stock is a growth stock or a value stock.

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Talking of the equity environment of 2022, the era of easy money looks to be over, at least for some time now. The growth stocks that led the bull market rally from April 2020 are seeing their valuations dip as US Fed tightens monetary policy amidst rising inflation following up with rate hikes. The economy is slowly slipping and has started showing damage as a result of higher liquidity.

José Torres, Senior Economist at Interactive Brokers is of the view that leading indicators such as the yield curve spread, consumer sentiment, PMI new orders, mortgage applications, and housing starts have weakened significantly as the economy simply can’t handle this much tightening.

“The bear market is not over, this is a ‘sell the rip’ market, not a ‘buy the dip’ one. Value is poised to continue outperforming growth while defensive sectors are poised to continue outperforming cyclical. Focusing on quality and free cash flow yields can work for investors. Overall, lofty valuations born in high liquidity, zero rate environment cannot sustain themselves in new, low liquidity, higher rate environment,” says Torres.

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As an investor, holding a diversified portfolio with a judicious mix of growth and value stocks is better than relying entirely on anyone. A blended or hybrid portfolio may work better than holding all the growth stocks or all the value stocks with the objective of minting money on the stock market.

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