VALUE GROWTH INVESTING GLEN ARNOLD PDF

We show that as popularly used, these are flawed concepts. We demonstrate why, and offer an alternative. It is understood that growth stocks will generate faster-than-average earnings growth, and that stocks that trade of low multiples of some variable are cheap. Growth stocks Growth indexes typically use three variables to select stocks that are expected to generate superior future EPS growth: growth in sales per share over the last three years; growth in EPS over the last three years; and price momentum. Past sales per share There is no relationship between past sales per share growth and future EPS growth. We divided them into five groups ranked by annualised sales growth over to and looked at the EPS growth over the following three years testing over a different three-year period also showed no relationship.

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We show that as popularly used, these are flawed concepts. We demonstrate why, and offer an alternative. It is understood that growth stocks will generate faster-than-average earnings growth, and that stocks that trade of low multiples of some variable are cheap. Growth stocks Growth indexes typically use three variables to select stocks that are expected to generate superior future EPS growth: growth in sales per share over the last three years; growth in EPS over the last three years; and price momentum.

Past sales per share There is no relationship between past sales per share growth and future EPS growth. We divided them into five groups ranked by annualised sales growth over to and looked at the EPS growth over the following three years testing over a different three-year period also showed no relationship. They found no positive correlation between past and future growth. In fact, firms with the highest historic EPS growth had, on average, the lowest future growth.

Price momentum There is no evidence that we are aware of that suggests superior future EPS growth can be identified through share price momentum. The answer, as is clearly demonstrated below, is no.

Some companies do indeed grow faster than others. However, they cannot be reliably identified by analysts, on average. Nor can they be identified by standard quantitative tools. Value Ranking stocks by measures such as PE, price-to-book or price-to-sales do not identify cheap stocks. They capture whether a stock trades on a high or a low multiple relative to the market.

However, they do not capture the essence of value, which is where the stock trades relative to where it should trade. A low multiple does not mean a cheap stock. Rather than thinking in terms of an artificial, binary distinction of growth or value, our approach is growth in value. Growth in value occurs through companies earning superior returns on invested capital.

Peter Brown 29th October, Thank you for this article. I found it insightful. I have thought that the binary distinction for a long time is too simplistic. It completely ignores companies that can be both or neither.

Analysts would be better to report on whether their stock picks represent growth at reasonable value GARV. I would be interested in you presenting a future post on how you found one of the companies you identified using your parameters.

Thank you. Stephen Arnold 29th October, hi Peter, thanks for your comments and question. I look forward to posting a wire on our approach in a more constructive sense ie what we look for, how we think about value creation, and where we have found it.

Cheers, Stephen.

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Growth hits new high against value, and three stocks could ride next leg higher

Despite their different investment choices, Simpson, now 81 years old, and Buffett in many ways have similar investment philosophies. Buffett so admired Simpson that he suggested at one time that the Geico CIO could step in should something happen to himself and Charlie Munger. For his part, Simpson said his smaller portfolio gave him an advantage over Buffett. Like Buffett, Simpson developed his investment approach through trial and error, evolving over decades. He was aiming for spectacular returns from a few star performers, hoping that he had guessed the future correctly. But through bitter experience he learned that good long-run results come from buying companies with established high performance rather than mere promises of future riches with low risk and at a low price. Do they have integrity?

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