Quick Thoughts: Value vs. Growth? Yes, Both

by Stephen Dover, CFA, EVP, Head of Equities, Franklin Templeton Investments

Our Head of Equities, Stephen Dover, gives his take on why value and growth investing are not different strategies.

Recent events have made it even more important to improve standards of due diligence. This also applies to value investing, where basic company valuation attributes like “high free cash flow yield” or “price-earnings (P/E) ratios at all-time lows” should not constitute a value investment case by themselves. Investors have to dig deeper to understand the business drivers, just as they would for a growth investment, rather than depending on these basic attributes to build an investment case. By doing this, in our view they can avoid falling into “value traps” in an environment of economic deterioration.

• Value investors need to look at several characteristics to identify whether an investment is a value trap or trapped value. Some of them may include pricing trends (falling or rising), growth rates, concentration (client or product), a strategy built around expense reduction, and payouts funded by debt.
• Investors can then further analyse whether the company has sufficient levers available to unlock value: pockets of higher growth, product innovation, reinvestment of cost savings, management’s strategic growth plan, to name a few.
• Investors should conduct deep due diligence to identify whether a company is permanently impaired or under-managed, or whether it can move resources around to accelerate growth and profits or build a new business.
• Value investors use evidence-based investing to avoid pitfalls: fundamentals and trends instead of just valuations; and whether a business is growing or not—as value is harder to create in a slowing or unprofitable business.
• One investment characteristic—margin of safety—is often cited as a reason to invest. This is not good enough without growth or progress, as the company will struggle to sustainably increase intrinsic value over time.

“Growth” and “value” are not different investment strategies, in my view. Without growth, value creation—growth of returns on capital that are greater than the cost of capital—is harder to do. Value investors want to see signs of growth, or a clear progress; they just don’t want to overpay for it. For further discussion, I invite you to read “Value Trap or Trapped Value?” by John Reynolds, Portfolio Manager of Templeton Global Equity Group.

*****

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of June 3, 2020, and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

The companies and/or case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton Investments. Past performance does not guarantee future results.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated, or may decline further in value. To the extent a portfolio focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a portfolio that invests in a wider variety of countries, regions, industries, sectors or investments. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.

This post was first published at the official blog of Franklin Templeton Investments.