Created: 31 August 2018

Stocks (Equities) are a medium that allows an investor to have a share in the ownership of a company through purchase of a company’s stock.  Equities are also described as representing an ownership in the assets and earnings of a company.  These definitions, while not perfect, can give you a basic idea about what it means to own the stock of a company.  Within the asset class of stocks there are a couple of main styles of stocks, and these are growth stocks and value stocks.  In this article, we are going to be discussing some of the key characteristics of growth stocks and value stocks.

A growth stock is defined by Wikipedia as: 

In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry.

Now that we have a growth stock defined, let’s dive deeper into some of the broader characteristics of growth stocks and how they can be differentiated from other types of equities (stocks).  Here are some of the basic characteristics:

1. Growth stocks usually grow in excess of their peers
2. Growth stocks typically pay no dividend, and invest all available cash back into the business
3. Growth stocks are often valued when they are early stage companies
4. Growth stocks usually have growth rates in earnings and revenue above 20%
5. PEG ratios are commonly above 1
6. Companies operate in large target markets & fast growing industries
7. Increasing Valuations - Valuations for growth stocks can be high with common P/E multiples in the high 20s and even higher.  If a growth stock performs as expected, it is common for these high valuations to become even higher in the early phases of corporate development.
8. Strong business model and wide competitive moat
9. P/E ratios often high relative to peers and the market multiple.  P/E ratios often over 20.

These are some of the characteristics that define growth stocks, but as we mentioned a growth stock is different  than a value stock.  Value investing is defined by Wikipedia as, 

Value investing is an investment paradigm which generally involves buying securities that appear underpriced by some form of fundamental analysis…

Basically, a value stock is undervalued based on some views of the market and the company.  What investors feel, is the stock should be valued higher, and it will soon return to a normalized valuation based on company fundamentals.  Not all value stocks have major negative events that have caused them to be undervalued.  In some cases, the market can develop a view of a company that has led it to be given a lower price multiple by the markets.  Here are a few value investing characteristics:

1. Value stocks are thought to be cheaply valued.
2. Value stocks are often companies that are currently out of favor, or companies that are currently experiencing negative market perception which has caused the stock to be undervalued.
3. PEG ratios are often below 1
4. Value stocks often pay a dividend and are historically stable companies, that have temporarily been mispriced by the markets.
5. Value stocks often trade at a lower price relative to their peers based on fundamentals.
6. P/E ratio is often lower than peers and the market multiple.  P/E ratios often less than 10.
7. Slower growing

So, after seeing a few characteristics of each style of stock, we can start to make some comments about the two investment philosophies.  The following comments relate to the mindset of an investor when making the initial investment decision.  At the time of investment, a growth stock is performing in excess of its peers, while a value stock is often trailing its peers due to a negative market perception.  Next, growth stocks are often in fast growing and cutting edge markets, while value stocks are typically in slower growing and more mature markets.  Growth stocks are investing capital into future growth, while value companies are often paying larger dividends and essentially divesting capital.  Paying higher dividends can have a negative perception of lower growth in the future, since the business is choosing to not reinvest the money back into the company.  Companies paying higher dividends can also be the result of an extremely successful company, simply generating too much cash.

At Robert Bender & Associates we favor investing in growth stocks for our clients.  Here are a few of the reasons why we lean toward growth stocks.  We believe that it is always best to invest in companies that are thought to have a bright future, and companies for which the market has positive expectations.  With a value stock, at the time of purchase, the stock is often out of favor, struggling with a low valuation, and there is slow growth.  If the value company is able to turn things around and overcome the negative circumstances affecting the stock price, this turnaround may only lead to limited stock upside.  Simply because the value stock has a turnaround, it does not mean that they will grow faster than their peers and in excess of the market.  We would argue that if a value stock turns around their business, and obtains an expected market valuation, that this may be all of the upside for the company.

In contrast to a value stock, a growth stock on the other hand can sustain above average growth that lasts for years and even decades.  A value stock is looking to regain a fair valuation, while a growth stock is looking for price appreciation of many multiples.  While there is uncertainty with both value and growth stock investing, we feel it is in our clients best interest to invest in well run companies, growing in excess of the market, and are usually considered to be one of the top companies in their sector.  We realize both styles of equity investing are void of guarantees of future performance, and both styles at times have periods of outperformance that can make either style appear attractive.  At Robert Bender & Associates we prefer to invest with growing companies whose future is bright, and not into companies that are potentially suffering from lower valuation.  One of the main challenges of the value investor, is to determine if the market was incorrect in ascribing a low multiple to the equity investment.

Over time, A Great Growth stock will Exhibit Value Characteristics

Let’s take Apple for example.  We invested into Apple when it was clearly a growth stock.  We first bought Apple  when it was switching to the Intel chip inside the iMac computers.  This investment was before the iPhone, iPad, iWatch, App Store, and iTunes, and we have owned the stock for over a decade in our growth portfolios.  In the case of Apple, the company has gone from being a fast growing company, to a slightly less fast growing company and now they pay a dividend to their investors.  Many value investment managers own Apple, and claim it is now a value stock because it is so cheaply valued and Apple pays a dividend.  We have owned Apple through this perceived value stock transition, and while it may exhibit some characteristics of a value investment, we still view it as a growth stock at the time of this writing.    

We have owned many stocks that were once clearly growth stocks, and eventually exhibited many traits that led others to view them as value stocks.  Any time we have a small growth stock grow and mature into a large dividend paying value stock, this often means we’ve owned the stock for many years.    At Robert Bender & Associates we employ a top down and bottom up fundamental analysis and apply our analysis to both markets and companies.  Our analysis leads us to invest in what we view are top quality companies which should grow in excess of the markets.  If you would like more information, please contact our office.  

Created: 18 May 2018

As defined by Investopedia:  A retail investor, also known as an individual investor, is a non-professional investor who buys and sells securities, mutual funds or exchange traded funds (ETFs) through traditional or online brokerage firms or savings accounts.

Behavioral biases are common triggers that can affect individual investors who manage their own money.  Some individual investors  will manage their own investments using one of the many tools or apps that can be easily downloaded to a smartphone.  Schwab.com for example has a few apps that will allow you to monitor your holdings and even execute a trade.  This type of unprecedented access to the markets has allowed the individual, or non-professional to easily buy and sell stocks with ease.  This ease of access to trading stocks can be both good and bad depending on the direction of the market.   Often the negative side effects of individual investing can lead to significant underperformance if trades are made at the wrong time.

Most people are affected by the 24 hour global, domestic and investment news cycles.  News flow is real time using apps like Twitter, and the constant flow of news can often have negative ramifications for the average investor.  As news flow comes in, it will affect emotions, and the behavior biases that we all have start to kick in and push people to action, or reaction.  This push to action is often driven by emotional biases.   Emotional actions, or reactions by investors can ultimately lead to underperformance.  

To give another example of emotional and reactive responses, we can look at how people often use their Twitter account.  The use of Tweets, or Twitter posts, is often the result of an impulsive response to a situation and often not a well thought out response.  The use of a smart phone, the Internet, and the constant news cycle may similarly drive investors to impulsively respond to a news item without acting like a professional asset manager.  A professional asset manager, like Robert Bender & Associates, will take many factors into consideration before making a buy/sell decision on a stock and will not impulsively react to a single news item or press release from a company.  Our research is based on a wide array of data points, and rarely does a single data point drive our decision in a stock.  Robert Bender & Associates will use a combination of fundamental, quantitative, and qualitative characteristics of a stock to form a top down and bottom up investment opinion.  The bottom up analysis of a stock is merged with a top down analysis, or a broad market analysis, which helps us make a more informed and rational decision about an investment holding.

The joke on Wall Street goes that if the bus driver is giving you stock tips, or the construction worker is telling you an options strategy, there may be some irrational exuberance in the market. Let’s examine this.  As the market cycle begins with a move from a low, a recession, or a bear market, there will be few people who want to jump into new positions in stocks.  As the market cycle matures, more and more people will see that stocks are performing well and they’ll want to enter the market.  As the market nears a top, literally everybody will become an expert at the stock market and they’ll be making recommendations about individual companies as well as trading strategies.  While some recommendations are viable, often the analysis is lacking depth when compared to what a professional would apply to the situation.  

The cost of making the wrong decision at the wrong time can be costly for your portfolio.  Missing the 10 best days of the market over a 20 year period can have dramatic ramifications for a portfolio.  As reported by BusinessInsider.com, the difference between staying fully invested and missing the best 10 trading days over a 20 year period can cut investment returns in half.  The decision of when to put money to work, or pull money out of the market can have a dramatic effect on overall wealth.  The timing of investment decisions is difficult for investment professionals, and often impossible for the average individual investor.  We do not try to time the market, instead, the portfolio managers at Robert Bender & Associates invest using a data driven process that aims to limit emotional trading responses and aims to limit individual behavioral biases.  Our goal is to implement a structured investment process to achieve above average returns for our clients while adhering to client portfolio objectives and constraints.

A professional investor is typically able to see beyond the short term market movements, and at Robert Bender & Associates we implement a top down and bottom up analysis to make more informed decisions.  Having a professional invest assets can also help to ensure that the individual investor doesn’t let their emotions take over and a professional often avoids costly impulsive trading mistakes.  When an investor lets their emotions make the trading decisions, they risk making the wrong decision.  We encourage you to contact Robert Bender & Associates to inquire about our professional money management services.