Growth stocks can also be viewed as the opposite of value stocks, which are companies that trade at prices below what their fundamental valuations suggest.
“Since some growth stocks typically do not generate positive earnings until later in their business stage, metrics such as price-to-earnings, dividend yield and earnings yield tend to be less relevant,” says Mark Andraos, associate portfolio manager at Regency Wealth Management. “Many growth stock analysts tend to focus on annual revenue growth and price-to-sales as two key financial metrics among others.”
Over many market cycles, growth stocks have historically seen periods of strong outperformance, but also periods of stagnant underperformance.
“Growth stocks have benefited greatly from a decade of near-zero interest rates, as they were able to issue debt at low rates to help fund their operations,” Andraos says. “When interest rates rose last year, growth stocks sold off as it became more expensive to borrow money, which coupled with already frothy valuations made them less attractive to investors.”