With the National Hockey League playoffs coming to a climax, it’s the time of year that brings to mind history’s greatest Stanley Cup moments. To be sure, it’s debatable which of those great moments is, in fact, the greatest. But one that has to be in the running is Bobby Orr’s 1970 Cup-clinching goal – a moment the Boston Bruins recently immortalized with the unveiling of a bronze statue of the Hall of Famer, mid-flight in the famous celebratory leap he made after scoring his historic goal.
Of course, as hockey fans are well aware, Mr. Orr’s special place in hockey history goes far beyond that famed goal. A defenceman blessed with tremendous offensive abilities, Mr. Orr was the first – and only – defender to lead the National Hockey League in scoring, redefining his position and paving the way for the likes of Paul Coffey, Brian Leetch, and other great “offensive defencemen” who followed.
So, what does all of this have to do with investing? While on the surface it might seem an odd comparison, Mr. Orr’s exceptional combination of offensive firepower and stalwart defence has something of a counterpart in the stock market. To understand how, you have to consider the two main categories into which most investors, commentators and investment companies put stocks: growth and value.
Because they are increasing earnings at a fairly rapid pace (and are expected to continue to do so) growth plays are usually the stocks that catch most investors’ eyes – they’re the goal scorers of the stock market, if you will. And, as with a great goal scorer, you often (though not always) have to pay a premium to get them.
Value stocks, meanwhile, tend to be large, established companies that, because of real problems, perceived problems or investor apathy, are trading at low levels compared with their earnings, cash flow, or book values. Like a solid defencemen, they often don’t come with the attention – or price tag – of a growth stock/goal scorer.
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While most of the investment world splits stocks into one of those two categories, however, “growth” and “value” are not mutually exclusive. In fact, in a 2000 letter to Berkshire Hathaway shareholders, the great investor Warren Buffett wrote that “market commentators and investment managers who glibly refer to ‘growth’ and ‘value’ styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component – usually a plus, sometimes a minus – in the value equation.”
Mr. Buffett knows that determining “value” isn’t as simple as comparing a stock’s price to one variable, be it earnings, book value, dividend yield, or some other barometer. He instead analyzes several different factors to determine what he thinks an investment will be worth at some future point – and what he is willing to pay for it now, given the risk that his estimate will prove too high. A high earnings growth rate in and of itself thus doesn’t mean a company is a good bet to fare well in the future. “Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years,” Mr. Buffett explained.
