Netapp: Is It a Growth or Value Stock?
Growth and value are words thrown around by some investors who don’t understand the significance of these labels. For over three decades, companies like MSCI (MSCI) have been slicing and dicing the universe of global stocks into categories like value and growth using objective measures. A stock can exist in both a growth and value index, though the total market cap weighting should always sum to 100%. Since large exchange traded funds (ETFs) track these indices, investors will gravitate towards certain companies based on their growth or value classifications. So, how does MSCI classify a stock as growth or value? Oftentimes, a stock gets classified as both.
Simply put, MSCI assigns each stock a market cap weighting of growth and value that sums to 100%. If a stock is 100% growth, then it’s only in the growth index. But if it’s 60% growth and 40% value, it’s represented in both indices. For value stocks, the classification process is quite simple. The MSCI Value and Growth Index Methodology looks at just three parameters when determining the extent to which a company should be considered a value stock:
- Book value to price ratio (BV / P)
- 12-month forward earnings to price ratio (E fwd / P )
- Dividend yield (D / P)
The last parameter is quite intuitive. When a company decides to pay a dividend, they’re effectively telling shareholders they can’t show a better return on the money internally compared to what an investor could manage. Traditionally, paying dividends is the domain of value companies, though European firms often pay dividends through periods of strong revenue growt
