Some well-known investors, including the likes of Warren Buffett, Charlie Munger, Benjamin Graham (Buffett’s mentor) preach the idea of value investing  Simply speaking, value investing is a strategy in the investment world wherein investors scout for undervalued securities that are trading below their intrinsic or fair price value. There is a general belief that the market may overreact to the good and bad news around the stock and in the process the stock price may not correspond to its long-term fundamentals and this is wherein value investing comes at play- allowing investors to invest in the scrip at a discounted price for future probable gains.

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Metrics used in assessing a company’s fair/ intrinsic value

For deciphering the company’s value, some of the financial metrics of high importance are:

Price to earnings or P/E: The ratio helps to determine the company’s market price relative to its earnings. Calculated by dividing the company’s market price with its earnings per share, the ratio helps in assessing whether the stock is fairly price, underpriced or overpriced.

Price to book or P/B: This ratio compares the company’s stock price with the value of its assets. And in case the price is on the lower side than the valuation of assets, the stock is deemed to be undervalued.

Free cash flow or FCF: This is another metric and it is the cash generated from the company’s operations after paying for the expenses, including opex and capex.

What is growth investing?

Growth investing, on the other hand, as the name suggests aims at growing investor’s money. Typically, herein investors tend to park their corpus in growth stocks-typically young companies that are seen to log above average growth in their earnings when compared to their peers within the industry or the market as a whole.

Strategy to analyse growth stocks:

Valuations:  Often these stocks command a higher valuation than other stocks in the same industry as investors are comfortable paying a higher premium in the expectation of better returns. In the case of growth stocks, the PE is generally above average. Also, one needs to analyse the company’s EV/ EBITDA and a lower value may mean a better investment option.

Growth versus Value investing: What should you choose?

Atul Parakh, CEO of Bigul, believes that given the current market dynamics with valuation concerns, especially in small/mid-caps, value investing appears more suitable. Value investing focuses on undervalued stocks with strong fundamentals, providing a margin of safety. 

Growth investing targets high-growth companies but often involves premium valuations, which could face volatility. As the market matures, value stocks tend to outperform. However, a balanced approach combining value and growth strategies based on risk appetite and investment horizon could be beneficial for investors, he adds.

Echoing a similar view, Santosh Joseph, Founder, Refolio Investments and Germinate Investor Services said there is a good merit to building a portfolio which is comprehensive of both growth and value because growth will give you almost the most stable and immediate return whereas value may need time to turn around or time to perform. There are many sectors of the country and economy which are in the growth phase and there are some which have not done as much as the markets have done and are available at value proposition. So we should not just go with the selection of  gro wth vs value. If possible, the portfolio should be built with both growth and value bend in mind so that you have a more homogenous return on the portfolio