Free course · Module 8
Value vs growth investing
Understand the labels, read the return evidence and test whether the price makes sense.
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Idea 1 of 4
Look behind the value and growth labels.
Value asks what you pay. Growth asks what may improve. Value stocks tend to have lower prices relative to measures such as earnings, book value or sales. Growth stocks tend to carry higher expectations for future business growth.
Neither label tells you whether the business is sound or the investment is attractive. A fast-growing company can be overpriced; a low-priced company can keep deteriorating. Start with the numbers behind the label.
The higher price needs a stronger explanation. A P/E alone cannot establish either company’s quality or style classification.
How do index providers define the styles?
A style label describes a method. It does not deliver a verdict.
Idea 2 of 4
Read the evidence without chasing the winner.
Leadership changes, and outperforming can still mean losing money. In 2022, S&P 500 Value returned −5.22% and S&P 500 Growth −29.41%. In 2024, Growth returned 36.07% and Value 12.29%. These are calendar-year index total returns, including reinvested dividends. Source 3 and Source 4.
These two years show why “last year’s winner” is a weak investment rule. They do not tell you which style will lead next, or how a particular fund will perform after its fees and taxes.
Relative leadership is different from an absolute gain.
What does the value-premium research actually say?
What makes a return comparison fair?
Compare the same periods and measures. Keep the uncertainty attached.
Idea 3 of 4
Avoid the value trap and the growth trap.
A low P/E may be a warning about the earnings. A stock at $30 with $5 of annual earnings per share has a P/E of 6. If earnings fall to $2 while the price stays $30, the P/E becomes 15. At $1 of earnings, it becomes 30.
This fixed-price illustration shows a denominator risk. A low multiple based on old profits can be misleading if those profits are not sustainable. A high multiple also needs scrutiny: strong business growth may already be assumed in the price.
Which business checks apply to both styles?
Check whether the earnings are durable before calling the price a bargain.
Idea 4 of 4
Try the price-and-earnings check.
Change the assumptions and watch the multiple. This simple model calculates P/E from a hypothetical share price and positive annual earnings per share. It does not calculate intrinsic value or predict a return.
What are you paying for the earnings?
Hypothetical · no trade$60 share price ÷ $2 annual earnings per share = 30×.
- Hold price at $60 and change EPS from $2 to $1. Explain why the multiple rises.
- Change EPS to $4. Does the lower multiple prove the business is better?
- Try zero or negative EPS. Explain why the usual positive P/E comparison stops being useful.
Use the screener to identify research candidates. A low P/E alone is not an index provider’s complete value classification, and a high P/E alone does not establish future growth.
Build a comparison you can revisit
Use the ratio to ask a better question, not to skip the research.
Quick check
Three quick checks. Feedback straight away.
Which measure does FTSE Russell use to score value in its style indexes?
Choose an answer to see the explanation.
What did Fama and French report in 2021 about the value premium from July 1963 to June 2019?
Choose an answer to see the explanation.
A stock trades at 6 times earnings, but its sales and profits have fallen for three straight years while its debt rises. What is the main risk?
Choose an answer to see the explanation.
Why can a low P/E still be a poor investment?
Review your takeaway card and the learning path
- Read the method. Style classifications depend on the index rulebook.
- Expect changing leadership. Historical outperformance does not predict the next winner.
- Check the denominator. A low P/E can rest on fragile earnings.
- Research both styles. Quality, debt and the price paid still matter.
Reading markers and these practice checks stay on this device. They do not mark the LMS lesson complete.
Sources and assumptions
- S&P 500 Value index. Provider’s value factors and index documentation.
- FTSE Russell, Russell US Equity Indices Ground Rules. Section 8.2: book-to-price and growth variables; overlapping characteristics.
- SPIVA U.S. Scorecard, Year-End 2022. Report 3: S&P 500 Value −5.22% and Growth −29.41% calendar-year total returns.
- SPIVA U.S. Scorecard, Year-End 2024. Report 3: S&P 500 Growth 36.07% and Value 12.29% calendar-year total returns.
- Kenneth French Data Library, Fama/French Factors. HML definition: high-book-to-market value portfolios minus low-book-to-market growth portfolios.
- Fama and French, The Value Premium (2021). Published abstract: July 1963 to June 2019, lower second-half average premiums and uncertainty about expected premiums. Paper’s premiums are measured relative to the market.
Historical examples are dated and do not forecast future returns. All company prices and earnings in the teaching diagrams and model are hypothetical. Model P/E is undefined for non-positive EPS. Local practice does not record LMS grades or completion.
StockEducation provides general education, not personal financial, tax or legal advice. Nothing here recommends a specific security. Investing involves risk, including loss of money you invest.
