Question

How would you define a growth stock? A value stock? Is Apple (AAPL) a growth or a value stock? Explain your position. Can a growth stock become a value stock? How does this happen? Give examples. Which company, growth or value, is more likely to pay a dividend? Explain. Explain why you think S&P 500 stocks are currently over valued or under-valued?

Answer 1

Growth stock: A growth stock is the stock of a company which is currently generating positive cash flows. The companies earnings per share are growing rapidly and it is above the industry average. The company is also looking for expansion of operation a reinvesting its cash flows in the company. They generally represent the Large-cap & upper mid-cap.

Value stock: it is a stock which is currently trading below its intrinsic value. It is considered as an undervalued stock by the market and investor. The characteristics of the stock are low PE ratio, low PB ratio and high dividend yield. It stocks are generally small-cap stocks.

Apple comes under growth stock.

Growth stock can become value stock under poor economic conditions. When they are fewer opportunities to invest For the company. It mainly happens with cyclic companies.
For example: Tata motors was a growth stock 5 years ago, Now it's a value stock.

The value stock will pay more dividend because growth stock will reinvest its dividend to accelerate it's growth and not pay it.

S&P 500 stocks are overvalued because they are trading at a higher PE ratio then it's average PE ratio.