By Abe Sherman, CEO BIG
Stocks generally fall into one of two broad categories, Growth or Value. Companies which are considered Growth oriented tend to be more expensive since stock prices are determined by the value of the company’s expected future earnings. Growth companies are those that continue to invest in themselves to fuel that growth. They typically don’t pay out much in dividends and are also usually leveraged, using debt to grow and take market share. Profits are not as important to them as market share. Apple, Amazon, Facebook and Google are good examples of growth companies.
Value stocks, alternatively, are more conservative in not only how they invest in themselves, but are also more generous when sharing profits in the form of dividend payments. Companies such as Exxon, Wells Fargo, JP Morgan, Berkshire Hathaway are examples of value companies.The differences between growth and value stocks are known and are easily searchable.
Philosophically, one can invest in either a growth or value oriented company, or have a blended portfolio of some of each, depending on one’s appetite for risk, volatility and length of time in the market. Generally speaking, decades is better than years – time tends to mitigate risk.
I offer this stock metaphor as a way of thinking about your own businesses. Some companies we work with are aggressive in their growth plans; borrowing heavily to build new stores (often buying real estate), rebuilding existing interiors, investing in new lines, spending considerably in advertising and internal systems as well as in their people. However, as with value oriented companies described above, many others have stopped investing in growth and are enjoying the fruits of investments of years gone by. Owners of these companies are reaping the benefits of prior investments and are in the stages of deleveraging their businesses, taking money off the table and, perhaps, thinking about exit strategies.
This contrast became apparent at a recent Plexus meeting when we were discussing the differences in how some companies are aggressive versus those who are more conservative. As we went around the room, it was very easy to point out which companies fall into each category, Growth or Value.
One example was about a Value oriented company who is also going through a succession from one generation to the next and, through a series of very bold moves, decided to become the leader in their market, investing heavily in the future growth of their business. They decided to grow whereas before they were very happy with their “Value” oriented business model.
These differences are about temperament, age, years before retirement, succession plans, attitude towards risk, aversion to (or comfort with) debt, having a vision for growth, being opportunistic as others exit their marketplace, and knowing what gets you out of bed in the morning. To some, it’s all about growth and the “game”. To others it’s all about being debt free with money in the bank. This is a personal choice.
As with building a stock portfolio, this isn’t always a binary choice. You don’t have to be either super aggressive or super conservative, but can blend the two, picking the right battles for growth without having an all-in strategy. But unlike buying mutual funds or ETF’s, which are considered passive investing, there should be nothing passive about the decisions you make when deciding what the future of your company should look like. Growth or Value? Either way, you should have a plan.