Posted: February 7th, 2016

What stocks shined? Drug stocks, for one. Why? They’re able to grow consistently at a greater rate than the overall U.S. economy. Their profits are likely to grow faster than those of the average U.S. company, too.

Discussion Assignment

Discussion Question

Please answer the above question (between 150-250 words)

Value vs. Growth–Which Camp Are You In?

The professional stock pickers on Wall Street specialize in a lot of ways. Some
focus on small-cap stocks. Some only look at foreign shares. And there’s another
way they tend to specialize: They’re either value investors or growth investors.
A growth investor is willing to pay premium prices for companies with
aboveaverage growth in sales and earnings. In contrast, the value investor wants
to go to the discount rack and buy cheap stocks that are out of favor or are being
ignored by Wall Street. Sometimes, growth stocks as a whole outperform value
stocks. And vice versa.
Growth stocks tend to do well when overall economic growth is sluggish. For
example, let’s say the U.S. economy grows only an average of 2% in the years
1998-2000. Investors saw that as a distinct possibility in early 1998, as the Asian
financial crisis threatened to choke off growth of the global economy. What
stocks shined? Drug stocks, for one. Why? They’re able to grow consistently at a
greater rate than the overall U.S. economy. Their profits are likely to grow faster
than those of the average U.S. company, too. The reason they’ve been growing so
well is that they’ve got lots of new products in the pipeline. In addition, the Food
& Drug Administration, which had long been a sluggish bureaucracy when it
came to approving new therapies, has been streamlined and is acting more
quickly. Because drug companies promised double-digit profit growth in a
singledigit world, investors have been willing to pay more than 30 times earnings
for many of these stocks. But even growth managers aren’t willing to overpay for
the privilege of higher sales and earnings. In mid-1997, Coca-Cola was selling at
nearly 40 times earnings, yet its profits were not projected to grow more than
20%. The stock was hovering around $70 a share when the company announced
that earnings were going to be disappointing. The stock tumbled to $55 within a
few weeks. Indeed, many growth managers temper their enthusiasm for a stock
by describing their style as “growth, but at a reasonable price.”
The value investors on Wall Street believe that it’s better to find a stock down on
its luck and buy it at a discount–as long as there is a potential catalyst on the
horizon to push up the stock price. The classic value stock of the mid-1990s was
IBM, which was selling at about 10 times earnings for a few years. The stock wascheap, and for good reason: The company had staked its future on huge
mainframe computers, but the world was moving toward the PC, which was
becoming increasingly powerful. Value investors in IBM believed that the
company had the strength to reposition itself into PCs as well as to move into
technology consulting for large corporations. A new chief executive officer was
brought in as the catalyst, and he achieved exactly that.
Growth and value investors are each quite passionate about their craft. But you
don’t have to take sides. Both styles have their place in a diversified portfolio.