Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 263

Should you be a value or growth investor?

The traditional distinction between ‘value’ and ‘growth’ investors is too simplistic. Classically, ‘value’ investors aim to generate returns from shares that offer a high yield from current earnings or dividends relative to their prevailing share price, whereas ‘growth’ investors buy shares with superior earnings growth potential. Since rapidly-growing companies are unlikely to be available at bargain prices, the two schools of thought are often considered to be at loggerheads.

Our approach is different. Investing isn’t about putting stocks into boxes. It’s about delivering superior long-term returns relative to the risks taken. When we make our assessment of a stock’s future-return potential, we’re primarily motivated by its intrinsic worth, an appraisal which includes due consideration for the value of future growth (if any). The critical question is whether we can buy a company’s shares for much less than they are truly worth.

Unlikely bedfellows

Viewed through a value/growth lens, Facebook and Peabody Energy would make unlikely bedfellows. How much common ground can there be between the growth-rich business of mining for data and the growth-starved business of mining for coal? Perhaps more than first meets the eye. Dig deeper and it’s evident that there is enormous economic demand for high-quality sources of both coal and data. Both are also targets of popular and regulatory backlash that threatens to restrict supply. And in both cases, we conclude that the prospects are brighter than implied by the current price.

Peabody Energy is the world’s largest publicly-traded non-state-owned pure-play coal miner. Amid all the talk of a shift to cleaner fuel sources like gas and renewables, it’s sobering to note that coal’s share of electricity production was 38% last year – exactly where it was 20 years ago. As global demand for electricity has increased, coal has proved its worth as a cheap and reliable fuel.

Can we do without coal?

That’s not to say coal is without its problems, and the environmental cost of burning coal is well known and beyond dispute. That said, the social cost of not burning coal is not to be ignored either. Consider China, the world’s most populous nation, which accounts for more than 50% of global coal use. Its drastic 2016 directive to cut coal production as part of a project to restore ‘blue skies’ over Beijing proved to be so punitive for households and small businesses that it was relaxed just months later. So as tempting as it may be to say, “let’s stop investing in coal”, the reality is not that simple.

A better solution to the pollution problem needs to consider how coal is used, not just whether it is used. If coal isn’t going away, at least those who rely on it can burn higher quality sources. That’s where producers like Peabody stand to benefit. Its most valuable mines are located in Australia and have been blessed with higher energy-content coal than the Indonesian mines that currently account for most of Chinese thermal coal imports. By gradually switching from Indonesian to Australian coal, the Chinese can generate the same amount of electricity with less coal, thereby releasing fewer pollutants into the air. As a result, Australian mines are struggling to keep up with demand.

But you’d never know that from market sentiment. Among widespread condemnation of coal in general, such differences in quality are often overlooked. Indeed, so out-of-favour has coal become that even the most promising coal projects are finding it hard to obtain approval from regulators or financing from banks.

Peabody itself has learned its lessons the hard way. Flying high in the commodity bull market that peaked in 2011, Peabody took on too much debt and found it could not meet its obligations when the price of coal turned south, eventually filing for bankruptcy in April 2016. Investors tend to ‘fight the last war’ and are worried about a repeat. But while Peabody’s operations haven’t changed much since the last peak, its financial position is markedly different. Net debt has fallen from $5.7 billion to zero, capital expenditure is down by almost 75%, and the company has plenty of loss carry-forwards to shield it from future tax. The result? Free cash flow has more than doubled from the last peak, while the company’s enterprise value is down by over 70%. In terms of cash flow yield, Peabody is a true outlier.

The risk, of course, is that Peabody’s present could be much brighter than its future. We think that’s unlikely, but it highlights one challenge of being a contrarian investor: if you are contrarian and wrong, it is generally for reasons that were obvious to everyone else. Lots of people hate coal, and if regulators go for broke and attempt to reduce coal use at any cost, they could hurt Peabody’s fundamental prospects.

Is Facebook also an outlier?

The graphs below chart the percentage distribution of companies on a trailing 5-year average revenue growth and a trailing 12-month free cash flow yield.


Source: Datastream, Orbis. Statistics are compiled from an internal research database and are subject to subsequent revision due to data cleaning or changes in methodology. Distributions show the percent of stocks in the FTSE World Index (excluding financials) in each bracket. Each value on the x-axis represents the maximum value in the range. Orbis estimate of trailing 12-month free cash flow used for Peabody.

Priced at a multiple that is close to the market average, Facebook is an outlier in a different respect: its growth rate has been spectacular. It too has more than its share of haters, with the Cambridge Analytica fiasco putting personal data squarely in the regulators’ spotlight. But, as with Peabody’s coal, there has been no let-up in demand for Facebook’s services along with its Instagram and WhatsApp properties. Users are still engaging with these platforms as much as they did before the scandal, while advertisers have shown no signs of deserting Facebook en masse.

The revenue that Facebook generates is primarily from advertising services. The company’s ability to deliver more effective and relevant ads, and to therefore charge a premium for them, is unparalleled because of the amount of data it knows on its users. Regulation that seeks to discourage the sharing of this data with third parties would strengthen Facebook’s competitive position, potentially allowing Facebook to capture revenue which previously had to be shared with partners. Meanwhile, the likely regulatory burden of having to identify and block inappropriate content is an exceptionally difficult task, one at which only the companies with the most sophisticated technology, like Facebook’s, will stand a chance of succeeding.

Regulation as a barrier to entry

No doubt increased regulatory scrutiny is a fact of life for both Facebook and Peabody. However, while heavy-handed regulation is often viewed with trepidation by investors, again we take a different view. In our assessment, higher levels of regulation tend to act not as a barrier to corporate success, but as a barrier to competitive entry, and are often beneficial for incumbents’ profitability in the long term.

We believe both Facebook and Peabody offer compelling returns for the long-term investor. Whether the returns are realised via growth or yield, or some combination of the two, is of little consequence: it’s the total return potential that counts for us, and always has been.

It’s true that we usually do a better job in market environments when shares with low expectations have outperformed those that everyone seems most excited about. But ask us if we are value or growth investors and our answer is: neither.


Ben Preston is Portfolio Manager at Orbis Investments, a sponsor of Cuffelinks. This report constitutes general advice only and not personal financial or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person.

For more articles and papers from Orbis, please click here.


Changing landscape of US large and mid caps

Unwinding is warning of late stages of boom

To zig or to zag?


Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.


Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.


Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.