Are You Stuck With Your Investing Style?
I definitely consider myself to be a value investor. I shun growth stocks and instead zero-in on those with decent yields, low amounts of debt, and reasonable key ratios such as Price-to-Earnings, Price-to-Book, and Price-to-Cash Flow.
My investing screens rarely allow for stocks that have PEs above 20, those with high debt, or upstart firms that aren’t currently profitable. Of course there are some exceptions to this rule with a small portion of my portfolio, far and wide my investment lineup consists of ‘boring’ stocks like EXC and PM to name a few.
Yet, deep down I know that I am certainly missing out on high flyers with this strategy. Although I definitely like Amazon (AMZN) and have thought about Chipotle (CMG) in years past, I simply cannot justify paying for the growth that is supposedly baked into these securities.
Currently, the forward PE that we are showing on Zacks.com for AMZN is over 370. Despite the many growth avenues that are open to the firm—in the form of increased international expansion and more media sales via the Kindle and Kindle Fire—I cannot rationalize buying up shares in a $110 billion company that has such an absurd forward price-to-earnings ratio (read Try Value Investing with These Large Cap ETFs).
Meanwhile, in the case of EXC, although it doesn’t have—if we are going to be honest—any real growth prospects, its reasonable PE and a yield over 5.75% make it too enticing to pass up, at least to me. Furthermore, the safety of the utility structure is also very appealing, unlike the riskiness of Amazon and its fight to not only be a retail king, but a force in the tablet market as well.
As you can tell from the paragraphs above, I am very biased in my investing strategy towards value, but I have also seen a similar trend among more ‘growth’ oriented investors as well. I know of at least a few people who shun any stock that pays a dividend, or those who demand an outsized growth rate in order to even consider investing in a stock, suggesting that the trend goes both ways (see Three Best Performing Small Cap Growth ETFs).
Perhaps, value investors are just hard-wired to avoid growth, and those who dabble in riskier stocks are unable to bring themselves to purchase the more mundane companies?
At first I thought this might be a bad thing as it eliminates a huge chunk of the investing landscape, but now I am wondering if, instead, it allows investors to focus in on whatever they believe works and forgo trying to develop dual strategies, which seems likely to result a subpar mixture of the two distinct styles.
Personally, I cannot think of anyone that has a true ‘blend’ investing style—and does it effectively—but what about you?
Do you also find yourself stuck in a particular investment style or have you developed any effective strategies for opening up your portfolio to growth if you are a value investor (or vice versa if you are growth investor)?
Let us know what you think in the comments below!
Disclosure: Long PM and EXC
Read the analyst report on AMZN
Read the analyst report on CMG
Read the analyst report on PM
Read the analyst report on EXC
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Read the analyst report on AMZN, CMG, PM, EXC
