Alger on the money - You get what you pay for
24 November 2017
Investors generally expect growth stocks to have higher price-to-earnings (P/E) ratios than value stocks but not everyone is aware of the reasons why. To understand this difference in valuation, consider the variables that drive P/E multiples: growth, profitability, and risk. Given how favorably growth stocks rate across these measures compared to value stocks, their higher P/Es may be warranted.
- The Russell 1000 Growth Index has higher expected EPS growth, higher returns on equity, and lower risk in the form of healthier balance sheets compared to the Russell 1000 Value Index.
- Growth stocks may generate strong returns in the future, if history is any indication (see Alger On the Money “Another Forecast from the Greatest Predictor”), despite their higher valuations relative to the broader market.
- At Alger, we strive to invest in companies that demonstrate the best growth prospects and we encourage investors to embrace growth as an important component of their portfolios.