Growth, Value -- What's the Difference?

I've long taken issue with the "growth" and "value" categories of stocks. After all, wouldn't you always want to invest in companies that present good values at current prices and grow at a decent clip?

That disconnect made the article I found the other day at the Ticker Sense blog all the more intriguing. It compared the P/E ratios of the growth and value indices for Standard & Poor's large-, mid-, and small-cap rankings, and found that "the aggregate P/E ratio for growth stocks is actually lower than value stocks."

Here's the table with the trailing P/E ratios:

Note that among mid-cap and small-cap stocks, growth companies seem more attractively valued, based on their P/Es.

Amusingly, the author drew nearly the same conclusion I would. He noted that this data suggests that growth stocks (at least smaller ones) are the better buys -- then added, "But what, exactly, is a growth stock?" He pointed out that fully 162 of the S&P 500's component stocks -- or 32% of the group -- are classified as both growth and value. For example, General Electric (NYSE:GE), Pfizer (NYSE:PFE), and Chevron (NYSE:CVX) occupy both categories in the S&P 500.

These findings come with a few caveats, though. This data may be interesting, but it tells us little about the attractiveness of specific stocks. A healthy, growing company with a strong competitive position may have a relatively high P/E but still prove a stellar long-term investment.

In addition, P/E ratios vary widely by industry, among other factors. Automakers, for example, tend to have single-digit P/Es, while faster-growing, less capital-intensive companies, such as software firms, may routinely have P/Es in the 30s and higher.

P/E ratios are calculated by dividing a stock's current price by its earnings per share (EPS). But EPS is not necessarily a hard-and-fast number. Companies can manipulate their earnings (legitimately) if they want to -- say, by carefully choosing when to make or record various sales. Fools shouldn't put too much trust in a P/E ratio without considering other factors as well. The more you know about a company, the better.

If you're interested in finding more promising, rapidly growing small companies, take advantage of a free trial of our Motley Fool Hidden Gems newsletter. Its recommendations are beating the market by a whopping 53% to 23%. Get full access to our archives, and read any recommendation in detail, with a free 30-day trial.

Longtime Fool contributor Selena Maranjian owns shares of General Electric. Pfizer is an Inside Value recommendation. The Motley Fool has a full disclosure policy.