Yahoo Finance Why buy value stocks when I could get a 23% long-term annual return from growth shares?
Finding value stocks isn’t hard. The challenge is finding those that are really worth owning. Sometimes, a company can be selling significantly below what it’s worth on paper financially but still not gain much in price over the next few years. The reason for this is that cheap shares are often cheap for good reasons. Some people can make big returns in valuations when investing in smaller companies, but with the bigger ones like RS Group (LSE:RS1), it becomes much harder.
My experience with RS Group shares
I bought a little position in this company in the second half of 2023. I still think I got amazing value when I did. However, when it came time for me to sell portions of my portfolio to pay for personal financial expenses, RS Group was one of the first companies I decided to cut.
Every few months, I go through my portfolio, and I take a look at the small positions I have built up. I then assess whether these are worth adding to or removing altogether.
The shares have grown around 150% in price over the last decade. That translates to a 9.6% compound annual growth rate, which is a bit lower than the S&P 500‘s 10.3%. In addition, RS Group has had periods of share price stagnation and recently, heavy volatility. I attribute this to the fact that the company hasn’t delivered linear earnings growth. It has even had extended periods of contraction in net income.
I’m not saying the shares aren’t worth my time completely. They certainly piqued my interest in 2023. However, I just think there are stronger, more secure investments for me to make
I prefer to own companies like these
One of my favourite industries to invest in is luxury. Unlike technology, which is RS Group’s field, luxury shares can be significantly more resistant to recessionary pressures and the associated volatility.
An example of a luxury company that I own and have never considered selling is Ferrari (NYSE:RACE). Its shares have gained 670% over the last decade. That translates to a compound annual growth rate of 22.9%, which is phenomenal compared to RS Group.
I absolutely love Ferrari’s brand and the fact that it can command super-high margins because its customers are paying for measurable performance but also intangible prestige. Its net margin is 20%+.
With a company like this, it’s almost impossible to get a cheap valuation. Ferrari’s price-to-earnings ratio is a lofty 54. However, the market’s sentiment around the shares is so positive that it’s managing to sustain and even increase this valuation over decades. In my opinion, understanding this nuance in investing is absolutely key to maximising returns in a secure and rational manner.
However, now with the advent of advanced technology entering car design, Ferrari has to be careful it doesn’t end up being considered a classic car company over the next few decades. It’s implementing elements of modernity, including electric vehicles and assisted driving, but this is still a risk for the firm to deal with.
Value or growth?
Some investors love value, and others love growth. In my opinion, I can build my portfolio with a healthy balance of both. After all, I have to assess even the most roaring growth investments for good value.
The post Why buy value stocks when I could get a 23% long-term annual return from growth shares? appeared first on The Motley Fool UK.
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Oliver Rodzianko has positions in Ferrari. The Motley Fool UK has recommended Rs Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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