As a rule, a company’s stock can be defined as value (in the cases when the company owns value stocks for the most part), growth (when a company acquires growth stocks), or blend (the incorporation of both notions mentioned above). The thresholds for defining the specified concepts, however, are rather vague. According to the existing evidence, the identification of the stock type can be carried out based on the characteristics such as the principle behind the selection, the low price/book and price/cash-flow ratios (with the MSCI EAFE Index in mind) and dividend rates (Crotzer 2008).
Speaking of the low price/book, the given factor allows for the identification of the further prospects of a company, as well as the chances for the organisation to earn good profits. According to the existing formula, the low price/book ratio can be calculated by dividing the share price of the company by the book value of its equity (Crotzer 2008). As a result, a company can identify the low-price stocks, which have been overlooked and need to be considered as a possibility for further investment.
Likewise, the value of the company’s stocks can be located with the help of the price/cash-flow ratios analysis. Defined as the method of evaluating the company’s cash flow (Crotzer 2008), price/cash-flow ratios are calculated by dividing the company’s share price by its cash flow per share (Crotzer 2008). Seeing that the price/cash-flow ratio is linked directly to the company’s experience in the target market, it can be assumed that the specified characteristics help identify the rates of a company’s maturity as well.
Finally, the incorporation of the MSCI EAFE Index into the analysis of the stock in question in order to define its belonging to the category of value deserves to be listed among the key factors to be considered. Recognised as “the pre-eminent benchmark in the United States to measure international equity performance” (MSCI EAFE Index 2015, para. 1), the above-mentioned measurement tool helps locate the rates of equity performance. Seeing that the latter is linked closely to value, it can be viewed as the key too identifying a value stock.
As far as the growth stocks are concerned, their identification can be carried out by analyzing the dividend rates paid by the company; as a rule, the lower the latter are, the closer the company’s stocks get to becoming growth oriented (Hopkins 2015). In addition, it is reasonable to consider the S&P 500 market index as a tool for colleting the data that allows for defining the stocks of a specific company as growth oriented ones: “Growth investors generally seek to identify stocks whose “intrinsic” or fair market value is expected to rise over time in response to projected increases in sales and profits” (Hopkins 2015, para. 3).
Thus, despite the seeming similarity between the existing types of the company’s stocks, they are, in fact, categorised according to their primary characteristics. Though not all of the features, which define the type of the stock under analysis, are clearly visible at first glance, a closer look at the subject matter will reveal that the existing stock types are miles apart from each other. By choosing a specific type of stock funds, the company, therefore, commits itself to a specific strategy that aligns with the type of stock selected by the organisation. Therefore, the decision making process must be based on the assets of the company in question and the opportunities, as well as the threats, which the target market contains.
Reference List
Crotzer, K L 2008, ‘Growth and value: an investigation of growth and value stocks with regard to the validity of the value premium,’ University of Vienna, Web.
Hopkins, C 2015, ‘Personal Finance: Stock investment styles – growth versus value,’ Times Free Press, Web.
MSCI EAFE Index 2015, MSCI, Web.