Abnormal Return in Growth Incorporated Value Investing

Abstract

Two main types of investing strategies are value investing and growth investing. In value investing investors search for stocks which are considered cheaper than average based on certain measures like P/E ratio or P/B ratio. In growth investing investors search for stocks with high gr0owth potential regardless of price. High growth potential is reflected in above average price. Thus value investing strategy and growth investing strategy are usually considered to be opposite of each other. This view ignores possibility that instead of opposite, they can complement each other. Particularly growth investing strategy can be used to solve the main problem in value investing, that is to differentiate between stocks that are cheap due to valid reason and stocks that are cheap due to mispricing. This study develops a method where growth factor is incorporated to value investing and thus indicating mispriced stocks among group of low price stocks.

Keywords: Value investing, Growth investing, Stock mispricing, Stock return