The line between what is meant by ‘growth’ and ‘value’ investing represents a sharply contested debate.
Quantitative investors – those who are led by stocks’ financial figures, ratios, price moves, forecasts and metrics – seem especially keen on this discussion, even though it ultimately boils down to a question of semantics, business judgement and subjectivity.
Take a low price/earnings ratio. Does an apparently cheap valuation simply reflect the market’s lowered growth expectations for the stock? Or is it low because investors have little faith in the quality of those earnings, or the probability that they can grow? What does ‘growth’ mean anyway? Is it above zero, above inflation, more than last year or double digits? And should we use earnings as our yardstick here, or take a more agnostic view of capital structures and costs?