Growth vs. Value: The Best of Both?
By Saghir Aslam
Rawalpindi, Pakistan

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live with dignity and fulfill their moral obligations towards charitable activities)
Managers of equity funds generally fall into one of two camps: Growth mangers, who covet companies with consistently rising sales and earnings, and value managers, who want businesses that are cheap when compared with their earnings and their assets.
The vast universe of companies does not cleave so neatly; desirable stocks have elements of growth and value, with a surfeit of one usually corresponding to a dearth of the other.
Sometimes, though, it is possible to have the best of both worlds, or at least the best of one world and not so bad of the other.
Growth mangers often say their ambition is to own stocks offering “growth at a reasonable price.” For value managers, the equivalent might be called “value with reasonable growth.” The Money Report gave FactSet Research Systems Inc., a research firm with a database comprising the global databases of many other providers of financial information, two sets of criteria and asked it to run screens of companies with market values of $250 million or more identify those of each type.
For the screen aiming to find growth stocks trading at modest valuations, the main growth criterion was earnings increases averaging 15 percent a year for the next five years, based on consensus estimates by brokerage analysts. Companies were further screened to include only those that have had at least some growth in earnings in each of the last five years; the idea was to provide a sort of reality filter and eliminate companies that make a good impression on analysts, mainly be being in such fashionable industries as high technology, but have no recent solid business history.
To add value to the mix, companies also had to have share prices that were less than 20 times expected earnings for next year and three times their book value.
The value screen considered only companies selling for less than eight times their expected earnings – a very low multiple, especially in times like these when markets generally are trading near the high end of historical ranges.
Companies with such low price-to-earnings ratios can be no-hopers in dying industries, some thing the use of projected earnings, rather than reported earnings, aimed to avoid.
To further increase the chances of finding stocks that are cheap but good, the screen eliminated any company that had cut its dividend within the last five years or that had a decline in sales in any of the last five years or that had a decline in sales in any of the last five years or that had a decline in sales in any of the last five years. To try to focus only on solid, if plodding, growers, the screen only considered companies with anticipated earnings growth of 5 percent a year for the next five years.
There are several familiar names on each list, such as BNP Paribas SA and Delta Air Lines Inc. among the growth and value stocks respectively, but many more obscure companies. Most of the companies on each list are American or British, but that probably reflects the fact that projecting earnings is ore of an Anglo-Saxon sport; in other equity markets there are fewer analysts to form consensus earnings forecasts.
The growth screen produced the more surprising results of the two.
Almost all the value entries are in conventional value sectors, most notably homebuilders and makers of cars and car parts. The growth stocks include many banks and transport companies normally thought to be cyclic businesses, and virtually no technology companies.
Eliminating from consideration growth companies with spotty earnings histories or sky-high valuations has left out many tech darlings of the last few years, while letting in companies, such as banks, that appear to have strong and persistent growth but are really closet cyclical.
“Where equity investors have gone wrong over the last few years is in thinking, ‘Oh, we can’t possibly include nonearners,’” he said. “What happened is that the 4 percent or 5 percent of the market that people were ignoring was the 5 percent of the market that went up 10 times.”
Economic conditions have been so sound for so long that banks have had fewer loans to write down and this has masked the cyclic nature of banking, he said.
If you don’t get to many cylicals among the growth stocks and if you equal weight each of those stocks, you’re probably not going to be miles wrong.
A better approach might be to adjust the weightings to build a portfolio that matches industry weightings in benchmark global stock indexes. Removing the value components of the growth portfolio and concentrating on companies with strong sales growth is also a good idea.


Growth Value

Anglo Irish Bank (Ireland) Finova Group (U.S.)
Armor Holdings (U.S.) Pilgrim s Pride (U.S.)
Papa Johns Intl. (U.S.) Bellway (Britain)
Lincare Holdings (U.S.) Stewart Entrpr. Class A. (U.S.)
Pomeroy Computer (U.S.) MDC Holdings (U.S.)
Valeo (France) Barratt Developments (Britain)
Vardy (Britain) Kellwood (U.S.)
O’ Reilly Automotive (U.S.) Persimmon (Britain)
Jones Apparel Group (U.S.) Enodis (UK)
Knight Transportation (U.S.) Westbury (UK)
Quiksilver (U.S.) Mayflower (UK)
Allied Irish Bank (Ireland) Borg Warner (U.S.)
ASR Verzekeringer (Neth.) Kaufman & Broad Home (U.S.)
Berkeley Group (Britain)


(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)



Editor: Akhtar M. Faruqui
2004 . All Rights Reserved.