J. Appl. Environ. Biol. Sci., 3(9)55-58, 2013 © 2013, TextRoad Publication ISSN: 2090-4274 Journal of Applied Environmental and Biological Sciences www.textroad.com Corresponding Author: Fatemeh Mir, Department of Accounting, Izeh Branch, Islamic Azad University, Izeh, Iran. E-mail: Fatemeh_mir@izehiau.ac.ir Comparison of Return on Value Stocks with Growth Stocks in Tehran Stock Exchange Fatemeh Mir 1 , Ehsan Hatami 2 1 Department of Accounting, Izeh Branch, Islamic Azad University, Izeh, Iran 2 Young Researchers Club of Islamic Azad University, Izeh branch, Izeh, Iran ABSTRACT Today, the concept of value and growth stocks have been studied as one of the most important investment strategies in various capital markets. The main purpose of this study is comparison returns of growth stocks with value stocks of listed companies in Tehran stock exchange. Therefore, five-year data of 50 companies were collected (2007-2011) and based on P/E ratio (price-to-earnings) were classified in five categories. Then, return average of each groups were compared. The results of study show that the difference between the average of return on growth stocks and value stocks was significant. The average of return on value stock is more than growth stock. KEYWORDS: growth stocks, value stocks, return, price-to-earnings (P/E) 1. INTRODUCTION Investment is a necessary and essential activity for the economic development of any country. In order to, essential funds for investment will be obtained, the resources to provide capital must be existed. People Savings of a society is the best source to provide capital. Therefore, a strong mechanism must be employed until this savings will be directed towards productive activities and various economic sectors. Thus, capital markets and specifically stocks exchange is the best place for use of savings in production sector. Some of studies show that, the return on value stocks average is higher in comparison with growth stocks in the financial markets (Rosenberg, et al 1985, Fama, F. and R. French, 1992, Lakonishok, Shleifer and Vishny, 1994). Growth stocks are Stocks which, price towards their cash flow, earnings, Dps and book value, is higher than market average. Growth stocks belong to companies that are not yet mature and abstain of distribution of profit as much as possible. These companies have generally suitable investment opportunities (Fama, F and French, 2007). One of the reasons that investors are interested to investing in growth stocks is, achieving firms increase profitability in the future. Growth investors seek to investment in companies stocks, that during the past time periods have had faster growth than average and so they have high growth potentiality. The growth is measured by factors such as Profits increase or amount of sales of a company. value stocks are stocks which their price towards cash flow, earnings, DPS and book value is Lower than market average (Fama, F. and French, 2003). Investors for investment in value stocks pay attention to the market value of the firm. Therefore, these types of investors have higher safety margin towards investment in growth stocks. Value stocks are pertaining to companies which have suitable profitability position, but market gives their stocks interim valuation that is below intrinsic value. Thus, investors expect that the market will discover this mistake in stocks pricing (Petkova, Ralitsa and Zhang, Lu, 2005). The value stocks are a kind of stocks that, it’s earnings, dividends, book value and other fundamental indexes are less in comparison with similar companies in the industry. So, according to criterions such as price- to-earnings ratio (P/E) and market value to book value ratio (P/B) stocks with low price are determined (Sharpe William.F1964). Growth stocks and value are in two sides of the profitability range. Growth stocks are in the below of range and value stocks are on the top of it. In the evolutionary process of firm, growth stocks always moves towards a high profitability and faster growth. Whereas, profitability of value stocks became less, is moving slower and is moving to the low profitability (Campbell, John Y. and Tuomo Vuolteenaho, 2004). Our goal in this study is comparison of returns average on value stocks with growth stocks. 2. RESEARCH BACKGROUND Fama and French (1997) in a study showed that the majority of the world's financial markets have the higher value stocks returns than growth stocks. In this study that was performed between 1975-1995, with the world’s portfolio which was sorted by (P / B), the difference between growth and value stocks annual returns was about 6.7% and value stocks have higher returns than growth stocks. Their results show that capital asset pricing model can’t explain the price premium, rather a two-factor model must be used to explain price premium of the international return. Rosenberg et al (1985) in a study showed that receipts dividend of growth stocks 55