Growth investing is based on the premise that some companies are predicted to grow their earnings substantially in the future, so investors are willing to pay more now for that future stream of earnings. This contrasts with value investing where investors typically try to identify stocks with a share price that is cheap relative to current earnings. Growth stocks often appear ostensibly ‘expensive’ when measured by the share price as a multiple of earnings, but as earnings increase in the future, so the stock price will increase as the multiple remains stable or even expands.
Examples of growth stocks are typically technology stocks or stocks of companies that are disrupting incumbents in an industry, while examples of value stocks are typically utilities or supermarkets which have consistent and known earnings streams that are not likely to grow substantially. Finally, growth stocks are often more sensitive to changes in interest rates because of their ‘longer duration’ earnings streams.
The sensitivity of growth and value stocks to the economic cycle is unclear because of the changing definitions of the two categories and the blurring of the lines between them. For example, if you include intangible assets such as intellectual property on the balance sheets of some technology stocks, they can begin to look like value stocks. It is worth bearing that in mind to avoid false precision about the distinction between growth and value.
To the pound 