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.

  •   19 July 2018
  • 1
  •      
  •   

RELATED ARTICLES

Is FOMO overruling investment basics?

Feel the fear and buy anyway

Changing landscape of US large and mid caps

banner

Most viewed in recent weeks

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

Welcome to Firstlinks Edition 648 with weekend update

This is my last edition as Editor of Firstlinks. I’m moving onto a new role though the newsletter will remain in good hands until my permanent replacement is found.

  • 5 February 2026

It’s economic reality, not fear-based momentum, driving gold higher

Most commentary on gold's recent record highs focus on it being the product of fear or speculative momentum. That's ignoring the deeper structural drivers at play. 

Latest Updates

Superannuation

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Investment strategies

Corporate earnings show resilience against volatility but risks remain

Evidence for a strong reporting season had been piling up for months and validated an upgrade cycle already underway. However, risks remain from policy uncertainty.

Superannuation

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings. 

SMSF strategies

Sixteen steps in a typical SMSF borrowing

Getting a mortgage is never an easy process but when an investment property is purchased in a SMSF the complexity increases significantly. Read this before taking the plunge. 

Planning

Do HNWI get better advice?

Good advisers lead to more diversification, lower turnover and less home bias. However, studies show the average adviser may not be adding much value to clients. 

Strategy

AFL Final Ten with wildcard edit 'unlevels' the field

When the new AFL season kicks off a wild-card will be added to the finals. Is this new formula fair and how does it impact the odds of winning the premiership.

Planning

Love them or hate them, it's worth understanding annuities

Investors have historically balked at exchanging a lump sum for a future steam of income. Breaking down the financial and emotional considerations of purchasing an annuity.        

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.