There is a widely held belief on Wall Street that investing in growth stocks entails a little more risk than "value" stocks since investors looking for growth are willing to pay more while value investors do not. Inherent in this belief is the distinction between value and growth investing. On the contrary, value and growth investing are joined at the hip; growth creates value. Also incorrect, is the belief that investing in growing companies constitutes taking on greater risk.
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Proof in the Pudding
Consider the Walt Disney (NYSE:DIS) one of the most well-known entertainment brands in the world. Over the past five years, Disney has grown its earnings per share at an annualized rate of 10%, an incredibly attractive number considering Disney's massive size. Even more incredible was that this growth occurred during a very difficult economic environment, an attribute to Disney's quality. Going forward, analysts estimate that Disney will grow its EPS by 15% a year over the next five years. Forecasts are inherently flawed but Disney's deep entertainment empire suggests that is possible. Disney trades at $42 a share and a P/E of 16, in line with the average future growth rate. That would suggest that Disney shares over the next five years could deliver a return of 15% annually.
Good Growth, Little Risk
Teva Pharmaceuticals (Nasdaq:TEVA) is a great candidate that offers solid growth with relatively little risk. Teva is one of the largest suppliers of generic pharmaceuticals, an industry that will grow in the years ahead as people age and many blockbuster drugs go off patent. Trailing diluted EPS of $3 is expected to reach $6 at the end of 2013. Trading at $44.55 or 14.5 times earnings today, Teva shares could be changing hands significantly higher over the next couple of years.
Thanks to a value seeking consumer, retailer TJX (NYSE:TJX) will likely do well for many years to come. At its flagship TJ Maxx store, consumers can find their favorite brands include Polo, Nike and other quality fashions and apparel merchandise for a fraction of the retailing cost. Even as the economy improves, consumers will not abandon their value seeking habits. TJX trades for 19 times earnings, yields 2%, and is a sweet spot to grow its profits over the years. The dividend payout stands a good chance of being increased as well. Much smaller rival Stein Mart (Nasdaq:SMRT) could also benefit from this tailwind. The company's EPS is set to grow from 49 cents this past year to 60 cents in 2012, or nearly 22%. Yet shares trade for under 10 times earnings. Clearly, the market is not convinced that SMRT can grow but the company's discounted fashions are likely to do well in this consumer environment.
The Bottom Line
Investing in companies that offer promising future growth does not have to come with excessive risk. Price paid determines risk assumed, while growth creates value. By looking at growth and value investment as two sides of the same coin, stocks with growth don't have to be riskier investments.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.