For those new to investing, the terms value stocks and growth stocks are what you will hear every other day as you decide what stock to buy, sell or hold.

Stocks, just like most investments are thrown into buckets to enable investors understand the peculiarity of each asset and decide where one’s risk appetite lies.

In this article, we shall explain the difference between Growth Stocks and Value Stocks as it pertains to investing in the Nigerian Stock Market.

Growth stocks

These are stocks of quoted companies that are in the early stages of their business cycles, characterized by phenomenal growth in revenues. Growth stocks typically post double digit revenue growth periodically (annually in Nigeria) and it doesn’t matter if they report profits or not. In fact, most growth stocks are expected to report losses because it is expected that they spend a lot more on marketing, advertising and anything that is required to scale up their operations.

Due to this, growth stocks always attract expensive valuations and are often priced at over 50 times their earnings (if they have one). They also do not necessarily pay dividends as investors bet against their ability to grow top line revenue exponentially and reward this expectation with high valuation. Bottom line, they feel these stocks will come through some day.

It is hard to find growth stocks in the Nigerian Stock Exchange because growth stocks are mostly found in the tech space. Investors also often misconstrue growth stocks with stocks that are considered bull traps. Stocks that attract high valuation despite not posting any results or have any inkling of a solid business operation.

However, a stock that may have been considered as a growth stock a few years ago was Forte Oil. Between 2013 and 2015, investors bet that the new management will turn the company around rapidly and valued the stock as high as 90 times its earnings at some point. The company tried to match these expectations by churning double digit profitability growth before the economy got into trouble, slowing down its growth.

A stock like Dangote Flour Mills can also be considered a growth stock. Ever since Dangote Group took it back from Tiger Branded, they have embarked on a massive turnaround that has seen the company report back to back profits for the first time in years. Investors have rewarded the company with higher valuation multiples. More so, the stock is still trading at very low valuation multiples, perhaps as investors wait to see if it can generate enough growth to clear out its accumulated losses of about N6 billion.

Growth stocks generally have high Price-to-earnings (P/E) ratios and high Price-to-book ratios, and are sometimes seen as expensive and overvalued.

Value Stocks

These are stocks that have attained a considerable level of maturity in their business life cycle. They are stable, less risky and post moderate but steady revenue growth, profits and always pay dividends. These attributes are often referred to as strong fundamentals for any company who possesses them.

Value Stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). Due to their low price to earnings ratio, investors often see them as bargain stocks and acquire them in the hope that the market will soon realise that they are undervalued. When this happens, the share price of these stocks start to rise relative to new information pertaining to its profits and/or dividend announcements.

For example, in the last two years since Nigeria faced economic crisis, banking stocks, particularly the FUGAZ, have traded at price earnings ratio of below 3x their earnings. Investors feared that they might post losses on the back of a poor economy and as such assigned low earning multiples to their valuation. However, as results poured out showing record profits instead of declines, investors now realised indeed that these stocks are worth more than they currently are. Value investors are expected have acquired shares in the stock because they know that their fundamentals are sound and will be rewarded when the time comes.

Sometimes, Value Stocks may have prices that are below the stocks historic levels or may be associated with new companies that aren’t recognized by investors. They may also have been affected by a problem that raises some concerns about their long-term prospects – such as recently poor operating results and negative outlook.

Another example, is just before the investor/exporter window was introduced, the stock market assigned very low price earning multiples to Nigerian Stocks. This is despite signs that the economy was turning around. Eagle eyed value investors always see these signs and quickly buy the stocks. Value Stocks usually have low P/E ratios and low Price/book ratios.

READ MORE: https://nairametrics.com/difference-between-growth-and-value-stocks/

FTC... I dedicate this to my Mother
God-bless Nigeria
Ameen..

Informative. Thanks for sharing

Hi

Nice writeup. As brief as it may seem, its very informative.

nice

Cool

Great article , wish it was as simple as one article post.

It makes more sense to play bet9ja than to put your money in the NSE.

The Alayes know the expected dividend before the public announcement.

Well done.

stocks



wud rather make my mills in crypto

Interesting

Advice for matured investors with plenty plenty money to tied down for a very very long time...

Tip: If you must engage the stock market, get a "well-seasoned" stock broker with "an active record of" success to work with.
Thank me later.

What's tha business?

.

Ok

chloride6:
Great article , wish it was as simple as one article post.

It makes more sense to play bet9ja than to put your money in the NSE.

The Alayes know the expected dividend before the public announcement.

IT WILL BE REALLY COOL TO BE AMONG THE ALAYES

Nice exposition.
The Nigerian Stock market is doing quite well.

I prefer investing my cash in cyrpotos than that scam called nig stock exchange have u guys forgotten wat dey did to everyone in 2007

Who will invest in useless Nigeria stocks exchange? It's nothing but pure scam. I can never forget how I lost all the money I invested in Daar communication shares, Japaul oil and gas shares, transcorp shares in 2008. Where are those companies 'shares today? Nigerian stocks is a daylight fraud.

Papertrail11:
I prefer investing my cash in cyrpotos than that scam called nig stock exchange have u guys forgotten wat dey did to everyone in 2007

Try American stocks instead.

Great, will come back to read in full