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As market sentiment shifts and interest rate expectations begin to soften, many investors are asking the same question: is it time to rotate back into growth stocks, or do value shares still offer the best risk-reward balance?
To answer this, it helps to understand the fundamental differences between growth and value stocks, how they’re assessed, and why some UK-listed companies are gaining traction in long-term portfolios again.
Growth vs. value: what’s the difference?
Growth stocks are companies expected to increase their revenues and earnings at a faster rate than the market average. These firms typically reinvest profits back into expansion, innovation, or acquisitions rather than paying out large dividends. As such, they often trade at a premium, with high price-to-earnings (P/E) and price-to-sales (P/S) ratios.
By contrast, value stocks tend to be more established businesses that trade at lower valuations relative to fundamentals. These companies may not grow rapidly, but they often offer stable dividends, solid cash flow, and resilient earnings – making them popular in uncertain markets.
How to evaluate stocks
When looking for growth stocks, key metrics to consider include revenue and earnings growth rates, forward P/E ratios, P/E-to-growth (PEG) ratios, and return on equity (ROE).
P/E ratios can be high but should be justified by expected future earnings. The PEG ratio should ideally be below one, indicating a good growth-adjusted valuation. ROE is a percentage indicating how efficiently capital is being used to grow.
When hunting for value stocks, investors look more closely at trailing P/E and price-to-book (P/B) ratios, seeking shares that look cheap based on performance. A high dividend yield and low payout ratio are key, reflecting income potential coupled with sustainability.
A solid balance sheet with low debt is important, particularly in slower-growth environments. Free cash flow is also necessary for financial health and dividend support.
A UK growth stock to consider
For investors considering growth stocks, Marks and Spencer (LSE: MKS) is looking good right now. The iconic British retailer has undergone a significant transformation, focusing on modernising its operations and expanding its online presence.
It saw a huge price surge of almost 40% last year and analysts seem confident it could keep climbing. The company’s management emphasises that their recovery is just beginning, suggesting sustained growth ahead.
My main concern is that its retail margins are sensitive to inflationary pressures, particularly the rising cost of labour, logistics, and energy. And in such a competitive sector, I’m wary about rivals like ASOS and Next muscling in on its market share.
Still, with a strong brand, improved operational efficiency, and a focus on digital innovation, M&S fits the profile of a growth stock poised for long-term returns.
Shifting sentiment
Value shares have held a majority portion of my portfolio in the recent high-rate environment, but the outlook for growth shares seems to be improving. As monetary policy shifts and investor appetite for risk returns, selectively adding more high-quality growth stocks could be beneficial.
After all, diversification is key and provides added potential for market-beating returns. The smartest money in 2025 may not be picking one camp over the other but blending the best of both.
