New York – Value vs. growth is an overused, and often artificial, dichotomy. Yet there are genuine distinctions in how growth oriented investors utilize research when compared to value investors.
Growth comes in many forms. The classic definition of growth investing relates to identifying companies whose profits and share price will beat the market over a long period. Growth investing has broadened to include different types of growth vehicles, including emerging markets and non-equity assets such as racehorses or fine art.
For equities, traditional growth investing focuses on earnings growth, price/earnings and PEG ratios. Fundamental research, which also focuses on earnings and price/earnings, is a natural fit. Understanding the consensus is an important component of growth investing, and for this reason proprietary investment banking research is valuable in understanding market expectations and forecasts.
Frustration comes from the over-abundance of fundamental research, compounded by the fact that large cap growth stocks tend be over-followed. Do we really need over 50 analysts following Google? Google Analyst Day is a fun outing with lots of free goodies but it is not clear that the hordes of analysts attending are adding much incremental value to the valuation of Google.
The disaffection with conventional fundamental research has prompted a growing number of investors to do their own primary research, sometimes for idea generation, more often for refining potential ideas. There are a variety of primary research tools available: expert networks, market research, channel checking, data mining, even web scraping (or search-based research as we call it.) Search-based research is becoming more popular among growth investors as a way to track new trends. Qualitative-oriented services like FirstRain track buzz in the blogosphere while more quantitative services like InfoSquire scrape data from the web.
The most popular primary research tools are expert networks, which are relatively easy to use and provide fast results. It is no coincidence that the most popular sectors for expert networks are growth-oriented, namely healthcare and technology.
Growth typically originates either from companies benefiting from technology advances (think Apple) or companies which dominate a niche (think Service Corp International which dominates the funeral home business). From a research perspective, growth investors place a premium on understanding industry trends. Sector specialists in growth-oriented industries, such as technology, health care, and biotech are well used by growth investors.
Increasing use is also made of Industry consulting firms which specialize in providing analysis and forecasts of a specific industry-typically sold back into the industry followed. Often the industry consulting firms are excellent sources for insights on emerging technologies, as well as competitive dynamics, new products, and pricing strategies.
Growth investors use specialist research firms, such as those that analyze intellectual property and patents, to understand the ability of growth companies to create barriers to entry. Firms that analyze regulatory developments are also popular for understanding whether growth companies are creating regulatory advantages, or whether changes in regulations will impact existing players.
Growth research is one facet in the growth of research. As growth investors have looked for new ways to analyze and identify growth, new types of research have come to the fore.