Why I Am A Value Investor

If you have seen what has happened to Netflix (NFLX) and Amazon (AMZN) today then you have a good idea why I am not a growth investor. Both of these high flying growth stocks have come crashing back to earth. A drop in stock price is normal for just about any company but these companies actually performed reasonably well and have seen their stocks drop. Amazon is expecting to grow earnings at 30%% or more for the next year. This fell under the 50% target that Wall Street had set for the stock so shared tumbled nearly 17% today. Amazon is back trading below $200 a share.

Growth Stocks Are Often Not Good Values

Meanwhile Wall Street’s least favorite stock, Netflix is down more than 35% on the day. Netflix saw its shares drop over $42 including after hours trading. The stock is all the way down to $75 a share which is a level not seen since 2010. The stock was pummeled once again as Netflix reported that it lost 800,000 subscribers. The company actually had a very profitable quarter but the slowing growth has investors concerned.

That is my primary issue with lots of growth stocks. Growth stocks often trade at earnings multiples that estimate growth rates that are clearly unsustainable. As soon as the growth slows, the stocks are hammered despite solid earnings reports. Don’t get me wrong when it comes to buying solid growth plays that trade at reasonable multiples. High priced stocks like Google (GOOG) and Apple (AAPL) are much safer investments than companies like Salesforce.com (CRM) which has a ridiculously valuation. I just think that too many investors are willing to buy growth at any price.

Value stocks may not be the darlings of stock market commentators like Jim Cramer but you are a lot less likely to get burned. I have found it much more profitable to buy growth on the cheap than to overpay for it. The best scenarios are when you can buy a growth stock that has been so beaten down that it has fallen into value stock territory.

A great example of this is when Apple was trading at $75 a share just two and half years ago or when Google dropped to under $300 a share. Right now, it is up to investors to decide if paying 10 times earnings for a company like Best Buy (BBY) is too much or is too cheap. Or is a company like Hewlett Packard (HPQ) finally a buy now that they have hired a quality CEO and the stock trades at under 6 times earnings?

Given the chance to pay 75 times earnings for a company or to pay 7 times, I will opt for the latter in almost every situation.

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9 Responses to “Why I Am A Value Investor”

  1. avatar krantcents says:

    I think you need a mix of value and growth stocks in your portfolio.

  2. I agree with you Krantcents. Your portfolio must be diversified!

  3. avatar PKamp3 says:

    Best part, Yahoo Finance P/Es even after today:

    AAPL: 14.37
    NFLX: 19.63

    Give me row 1!

  4. avatar Vince Thorne says:

    The ultimate question is can the company grow at the same rate. Netflix, maybe not. AMazon, maybe. But I agree that an superficial proce adjustment stemming out of over-reaction to an event does present a buy opportunity.

  5. Investing in value sure seems like a good way to go. Obviously Warren Buffett has done well as a value investor.

  6. It is not bad to invest in value, but it will always be better if you create a diverse portfolio. Try it!

  7. I would agree that growth stocks are not good investments. Thats because when you buy a growth stock you are buying growth and earnings expectations. And how can anyone claim to be able to predict that to any degree. On the other hand value investing is generally buying a company for much much less in some cases than what the market is currently valuing the company. How would you like me to show you two houses that are both the same in every possible way but you can buy one house for half the price as the other house. That is the essence of value investing in stocks.. And the thing about all this is their are many great value stocks that do trade under ten dollars.

  8. avatar Nicole says:

    It makes sense to invest in companies that will hold their value. Personally I am a mix between value investing and growth.

  9. avatar Andrew says:

    I agree on the value stocks for the longer term. Although I am a bit more of a swing trader, I’m all about value when looking longer term. And only stocks/companies that I understand.

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