Know the difference between value stocks and growth papers

In the investment market, shares can be classified as common and preferred or by the sectors in which the companies operate. But there are two terms that also help investors when building their portfolios: growth stocks and value stocks.

At growth stocks , as the name suggests, have high potential for advancement. That is, they are shares of companies that had an increase in sales revenue and profit.

Due to past high growth, investors expect these companies to “continue to grow in the future” and this makes such assets trade at higher multiples, explains Igor Cavaca, head of investment management at Warren Asset.

Examples of these growth companies are technology companies, “which start small, like startups, and follow the growth path”, says Eduardo Cavalheiro, manager of Rio Verde Investimentos.

Already the value actions are assets traded below what is considered fair by the market. The deserved price is usually determined from an analysis of data, such as the company’s cash, Ebitda and price-earnings index, for example.

Those who invest in companies with value stocks, says Marcelo Oliveira, CFA and founder of Quantzed, can expect predictable, slow and steady gains over the years. But he points out that returns are usually lower than growth papers.

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Cavaca says that the decision on when to invest in each type of asset is closely associated with the macroeconomic environment. In times of high economic growth, value assets tend to perform better.

On the other hand, growth assets benefit in recessionary moments, associated with low interest rate scenarios.

“Now, in this recent market slump, there are growth companies with a drop of 80%, and value ones fall less, as profit and cash generation are more palpable”, comments the manager of Rio Verde Investimentos.

The founder of Quantzed says it is important to have both types of shares in the portfolio. But he points out that it is necessary for the investor to select well the growth companies that will compose the portfolio, as they offer more risk compared to value companies — which hold volatility due to predictability.