My investing muse - growth versus value stocks (24Jan2022)

For some of us, we look at value and growth stocks as 2 sides of the same coin, as 2 separate camps. In our minds, a high growth stock may not be a value stock and vice versa.

let me put in context what criteria I use to qualify stocks as a "value" stock:

1. good financial fundamentals (good trend of revenue, net income, net debt and free cash flow, seen only years and not just in quarters)

2. durable competitive advantage - in branding, price positioning, cost leverage, technology, innovation

3. good management with integrity

4. margin of safety - market price being offered with a discount. this includes calculating the intrinsic value or fair value of the business using FCF or DCF, etc

5. Know the business - as investors, we need to understand the business products and services, the market reach, the industry, etc.

some of the high growth stocks promise future profits thanks to their innovations. These cannot be considered value stocks if they are missing elements from above like a track record of improved earnings, profitability and cash flow. There are quite a number of these high growth stocks that have yet to achieve profitability with the promise of disruptive technologies. It is not to say that they will not make money in the future but personally, I prefer to invest in the business after they display the above over time.  These for me, could not be considered as value stocks.

So if we look at things from a different perspective, a value stock can also have high growth but it has to tick many more boxes apart from a promise of future profits.  This does not mean no profits in the future but failing to qualify the criteria above, I would not consider them as value.  Without a good margin of safety, I would recommend waiting for better opportunities.

Thus, there are also value stocks that demonstrate good or strong growth. What I regard as a value company are companies such as ‌$Berkshire Hathaway(BRK.B)$  and ‌$Coca-Cola(KO)$  ‌ with financial strength, strong branding, competitive advantage and more.  In fact, I recommend considering getting Berkshire stock over ETF.  Apart from a few companies where I am doing dollar-cost averaging, I am saving up to get some stocks "with discounts" during market corrections.