As opposed to value stocks, growth stocks are usually what the general public associates with the stock market. These are typically more “exciting”, innovative companies which investors believe will have high earnings growth moving forward. This perception is also usually reflected in the price of the stock. For example, the Russell 1000 growth index has a P/E of approximately 20 and a P/B of about 4. Compare this to the Russell 1000 value index, which has a P/E of about 14 and a P/B of around 2. However, 5 year earnings growth for the growth index is 20% vs. about 17% for the value index.
Growth Investing
Like value stocks, growth investing can also be used to describe an investing “style”. That is, some investors only look for innovative companies which, even though the price is high or above average for the market, still stand to perform well. A classic example of this is Google, which has a P/E of about 47 but is perceived by investors to have good future prospects for growth. However, even growth investors have a problem with paying this much for a stock, or for any stock. You will sometimes hear them described as “GARP” or “Growth At a Reasonable Price” investors. That is, they will pony up for good growth stocks, but won’t pay superflous prices for them. (Even if earnings stand to grow significantly moving forward).