If Benjamin Graham is the original value investor and Warren Buffett the original moat investor, who would you associate growth investing with?

The name that comes to mind is Peter Lynch.

Lynch, the legendary fund manager at Fidelity, advised investors to choose growth stocks over value stocks.

He even devised a formula for it, arguing how over a long-term period, a growth stock will end up giving better returns than a value stock even if growth is available at expensive valuations.

However, if you are a growth investor, don’t break into a celebration just yet.

Just as there are examples of growth beating value, there are also examples of value beating growth.

Let me give you one from real life.

Back in April 2020, I happened to look at two stocks viz. eClerx Services and Page Industries.

eClerx was a classic value stock, growing its earnings at a slow pace. Its earnings were down 20 per cent from the previous year when I was checking it out. However, it seemed like a temporary pullback to me and I felt that the earnings would eventually recover.

Page Industries, on the other hand, was a growth investor’s dream come true, growing its earnings by more than 20 per cent over the last five years.

However, what happened to the stock price of the two companies since then may surprise you.

While Page Industries has done well and has seen its stock price go up by 78 per cent, eClerx Services has done even better, and is up an impressive 222 per cent.

Now, that’s interesting. A value stock knocking the daylights out of a true-blue growth stock.

What does it give? Well, my one-word answer to this is ‘valuations’.

Back in April, Page Industries was trading at a princely price to earnings multiple of around 50x. Given its historical growth rate in earnings of 20-25 per cent, I felt that this was on the higher side.

eClerx services, on the other hand, had a low single-digit earnings multiple of around 6x.

Thus, investors are willing to pay more than 8 times per rupee of profits earned by a growth company like Page Industries as compared to a value stock like eClerx.

I have no idea of the premium that Page Industries deserves over eClerx. What I do know is that it is certainly a lot less than 8x.

Of course, comparing companies from different sectors is like comparing chalk with cheese. However, it still doesn’t make any difference to the point that I am trying to make.

It is not about growth vs value. Always choosing a high-growth company over a low growth one irrespective of the underlying valuations, could be a recipe for disaster. As in the case of eClerx services, a low growth company can end up doing much better than a high growth one provided the valuations are attractive.

It was quite evident that at 6x earnings multiple, a company like eClerx Services was quite attractively valued. And at 50x earnings multiple, a company like Page Industries was expensive.

Thus, over a medium-term time horizon of 2-3 years, there was always a strong possibility of eClerx outperforming Page Industries and this is exactly what happened.

Thus, the entire thing doesn’t have to be about value vs growth.

The stock that trades at the biggest discount to its intrinsic value should be bought, irrespective of whether it is growth or value.

Given the valuations, it seemed to me that eClerx was trading at a minimum 50 per cent discount to its intrinsic value. In other words, the stock had a potential upside of at least 100 per cent.

Page Industries, on the other hand, seemed more or less fairly valued or even slightly overvalued.

My judgment was vindicated with how their respective stock prices have responded over the last year.

I won’t be surprised if the same pattern is repeated over and over whenever you have to choose between two companies of this kind. So, forget growth or value and focus more on where you are getting a bigger bang for your buck.

The author is Co-Head of Research- Equitymaster