Cheap Stocks vs. Growth Stocks

Cheap Stocks

Most people know what growth stocks are. There’s a little more gray area when it comes to cheap stocks.

To some people, a cheap stock is one that is low-priced, like SunEdison (SUNE), currently trading at less than a dollar per share.

People who like these stocks generally don’t have a lot of money to invest, and they like the fact that they can buy 100 shares of stock for less than $100 (plus commission).

To other people, like Warren Buffett, a cheap stock is one that is selling at a price that’s below its true value. Wells Fargo (WFC) is one he’s been buying recently. With a P/E Ratio of 12 and a dividend yield of 3.07%, the banking stock is cheap by Warren’s standards. The fact that the stock is trading near $50 a share is irrelevant to him.

For my money, the first stock (SUNE trading under a dollar) is certainly low-priced, but that doesn’t make it cheap!

Here’s its chart, which to date has proved the value of the old investing warning, “Don’t try to catch a falling knife.”

The second stock, WFC, trading near $50 per share, is high-priced by some people’s standards, but it can still be called cheap, especially if there’s a good possibility that it will be a high-return investment in the years ahead.

Growth Stocks

Growth stocks, on the other hand, are often bought without regard to valuation. Growth stocks are bought with the expectation (or hope) that revenues and earnings at the company will soar in the quarters ahead, and the stock will follow suit.
A favorite growth stock of the past was Apple (AAPL), which had a great run from 2003 until 2012. But AAPL has been lagging the market since, and the stock has yet to break out of the downtrend that started in the middle of last year. Yes, AAPL as a company is still growing at a good rate, but there are two reasons the stock isn’t going up today.

One, everybody who wanted to has already bought the stock, and now some of them are selling AAPL and buying the stocks of faster growing companies. And two, looking ahead, more and more investors appear to be concluding that Apple’s earnings growth will keep on slowing.

A Better Growth Stock

More recently, Facebook (FB) has been gaining great sponsorship from both institutional and individual investors, as the company works to monetize its vast user base as well as its impressive portfolio of properties—particularly Instagram, Messenger and What’s App.

Facebook (FB)

Since early February, FB is up 17%. Last week it hit resistance at 116, which is where the stock topped out at the end of January. I think it’s just a matter of time until FB breaks out to new highs.
Now, you might ask, “But isn’t FB also a popular stock like AAPL?”

In a word, “No.”

While Facebook the company has been around quite a while, FB the stock only came public in 2012. It’s less than four years old. And that four-year period was not a period of strong bull markets, so my conclusion is that FB is still under-owed by investors.

Which explains why it’s going up now. And why I think it will continue to go up.

Perhaps you should own some.

More to the point, perhaps you should get professional guidance on exactly when to buy some FB—and eventually on when to sell it. To get started, take a look at my own advisory, Cabot Stock of the Week, which every week features one great stock that’s previously been recommend by one of the Cabot analysts. The result is a well-diversified portfolio of growth stocks, value stocks, emerging markets stocks and dividend stocks—all in one convenient and easy to follow advisory.
You can find details here. 

A Great Bull Market

Lastly, a word about the market as a whole.
On any one day of the year, it’s easy to be bullish or bearish.
Today, if you want to be bullish, you can focus on the Fed’s recent announcement, on the fact that we appear to have side-stepped a recession, on the fact that the market is strong, but not overvalued, and on the fact that low oil prices are a boon to consumers.

Or, if you want to be bearish, you can focus on the negative interest rates in Europe that suggest the whole developed world is slowing down, on the increasingly high levels of debt in the U.S. and elsewhere, on the growing power of China and our inability to stop their takeover of the U.S. through buying bonds, equities and whole companies. And, of course, you can point to the current U.S. presidential race.

But those are the things everyone already knows about, and as I’ve told you many times, if you want an edge in investing, you need to ignore that noise and look at things that the masses of people are either ignoring or unaware of.

I found one recently, and I’d like to share it with you today.
The chart below shows the trailing 15-year total return of the S&P 500.

At the chart’s most recent peak, back in mid-1997, the trailing 15-year total return of the S&P 500 was 19.66%, which is a really great return. After that, the bull market went even higher, but leadership narrowed and shifted to the Nasdaq.

At the chart’s recent bottom, the trailing 15-year total return of the S&P 500 was a measly 3.76%—and it feels like it. While the man-on-the-street was excited about investing in the late-1990s, today he doesn’t care at all. No one’s getting rich, not even hedge fund managers!

And what does the theory of contrary opinion say about that?
That the best time to invest is when no one wants to invest!
Note: you see a previous low in 1974, when popular worries included high oil prices, stagflation and Watergate. That was a great time to start investing.

And you see a previous high in 1957 (The Fabulous Fifties), near the end of the bull market that was kicked of by World War II and nourished by the Baby Boom birth wave.

The message from this chart, therefore, is simple. It says you should be long-term bullish about investing now, trusting that a wave of growing interest in investing, combined with genuine increases in productivity (robots, for example), will push the markets substantially higher over the next decade-plus.

Happily, the simple fact that you’re reading this means you’re already ahead of the crowd!

So keep on reading, and keep on investing. There’s great growth ahead. And if you’re interested in getting more specific advice on what to buy and when, I’d love to have you as a reader of my Cabot Stock of the Week, which every week focuses like a laser on the one best Cabot stock to buy now.

Yours in pursuit of wisdom and wealth, 

Timothy Lutts

Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory

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