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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 profitabilitygrowth 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.
Summary of the differences between
Growth and Value Stocks
A Value Stock is cheap relative to some
measure of its intrinsic value. Value Stocks are companies that are
undervalued, and are out of favour with the market due to poor operating
results and or slowing growth. Due to the gloomy nature and negative outlook of
these stocks, investors overreact and Value them lower than they should be.
Growth stocks are overvalued with recently
great operating results and fast rising growth. Investors overreact to these
stocks and Value them higher than they should be. 
Note: Growth and Value Stocks are
styles of investing in stocks. Neither approach is guaranteed to provide
appreciation in stock market value as both carry investment risk.