Value stocks are those that are trading at lower price relative to their actual value based on several parameters (such as dividends, earnings and so forth) and usually have higher dividend yields, lower price to earnings ratios or lower market value to book value ratios. Investors choose value stocks so that they generate long term returns while surviving the short term fluctuations on the back of tough market conditions. On the other hand, growth stocks are those which usually generate lower dividend yields as compared to the value stocks and even trade at higher price to earnings ratios. Investors choose growth stocks as they expect these stocks to deliver higher earnings and consequently better stock returns despite buying them at higher valuation metrics and lower dividend yields. Further, growth stocks provide returns from future capital appreciation rather than dividends. However, tax-law changes have led to growth companies also giving returns in the form of dividends.
 

S&P 500 Growth versus S&P 500 Value in last two years (Source: Thomson Reuters)
 
It has been seen that growth stocks are able to generate better returns even during the market rallies after the slowdown in the economy or recession periods. For instance, the S&P 500 Growth (INDEXSP: SP500G) was able to surge over 182.2% after the great recession as compared to the S&P 500 Value (INDEXSP: SP500V) increase by over 147.94% (March 06, 2009 to February 26, 2016). Even, Dow Jones U.S. Large-Cap Growth Index (INDEXDJX: DJUSGL) rallied over 176.73% (Since March 06, 2009 to February 26, 2016) against the Dow Jones U.S. Large-Cap Value Index (INDEXDJX: DJUSVL) increase of 134.15% for the same period. The mid cap growth stocks delivered more outstanding returns, wherein Dow Jones U.S. Mid-Cap Growth Index (INDEXDJX: DJUSGM) surged over 223.5% as compared to Dow Jones U.S. Mid-Cap Value Index (INDEXDJX: DJUSVM) returns of 215.98% (Since March 06, 2009 to February 26, 2016). But the returns of small cap value and growth Dow jones indices performance were almost close, with Dow Jones U.S. Small-Cap Growth Index (INDEXDJX: DJUSGS) rising over 196.9% as compared to Dow Jones U.S. Small-Cap Value Index (INDEXDJX: DJUSVS) returns of 186.4% during the same period.
 
There have been several opinions on choosing between growth stocks and the value stocks based on the investment risk appetite. Investors might be under the impression that they need to withstand the heavy fluctuations of growth stocks during slowdown or recession, even though they deliver better returns after these tough market periods. Accordingly, investors who have a higher risk appetite might choose growth stocks against value stocks. Conversely, investors who are seeking for stable long term investments could opt for value stocks as these stocks have the capability to generate decent returns in the long term, as well as correct less as compared to the growth stocks and withstand the pressure during the turmoil in the global market conditions.
 
But, if we see the major indices performance, value based indices fell more than the growth based indices during the slow down period of 2008 and 2009 years. The S&P 500 Value (INDEXSP: SP500V) corrected over 48.76% during the tough market conditions in 2008 and 2009 (January 04, 2008 to December 30, 2009) while S&P 500 Growth (INDEXSP: SP500G) lost over 19.2% during the same period. Even, Dow Jones U.S. Large-Cap Growth Index (INDEXDJX: DJUSGL) fell only over 20.3% (January 04, 2008 to December 30, 2009) against the Dow Jones U.S. Large-Cap Value Index (INDEXDJX: DJUSVL) decrease of around 30% during the same period. Dow Jones U.S. Small-Cap Growth Index (INDEXDJX: DJUSGS) declined only 19% as compared to Dow Jones U.S. Small-Cap Value Index (INDEXDJX: DJUSVS) heavy fall by over 47.3% during the same period (Since January 04, 2008 to December 30, 2009). But, Dow Jones U.S. Mid-Cap Growth Index (INDEXDJX: DJUSGM) dropped more by over 25.7% during the period as compared to Dow Jones U.S. Mid-Cap Value Index (INDEXDJX: DJUSVM) correction by over 18.9% during the aforementioned period. The conclusion is that growths stocks might turn out to be better investments even during volatile market conditions than the value stocks. However, investors need to review several other parameters to understand if their choice of growth stocks would be able to deliver the earnings growth as forecasted and also withstand the current challenging market condition, foreign currency fluctuations, rising interest rates and falling commodity prices. The type of investment as growth or value being made does not simply guarantee returns as market conditions play a great role in deciding the fate. Accordingly, one may have a balanced portfolio with growth and value stocks while looking at how to manage risk looking at all the parameters.

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