What Is Growth Investing?

Growth investing is an investment style and strategy that is focused on increasing an investor's capital. Growth investors typically invest in 澳洲幸运5开奖号码历史查询:growth stocks—that is, young or small companies whose earnings are expected to increase at an abovജe-average rate compared to their industry sector or the ꦆoverall market.

Gr▨owth investing is highly attractive to many investors because buying s🌺tock in emerging companies can provide impressive returns (as long as the companies are successful). However, such companies are untried, and thus often pose a fairly high risk.

Growth investing may be contrasted with 澳洲幸运5开奖号码历史查询:value investing. Value investing is an investment strategy that involves picking stocks th🌄at appear to be 🉐trading for less than their intrinsic or book value.

Understanding Growth Investing

Growth investors typically look for investments in rapidly expanding industries (or even entire markets) where new technologies and services are being developed. Growth investors look for profits through capital appreciation—that is, the gains they'll achieve when they sell their stock (as opposed to dividends they receive while they own it). In fact, most growth-stock companies reinvest their earnings back into the business rather than paying a dividend to their shareholders.

These companies tend to be small, young companies with excellent potential. They may also be companies that have just started trading publicly. The idea is that the company will prosper and expand, and this growth in earnings or revenues will eventually translate into higher stock prices in the future. Growth stocks may therefore trade at a high 澳洲幸运5开奖号码历史查询:price/earnings (P/E) ratio. They may not have earnings at the present moment but are expected to in the future. This is because they may hold patents or have access to technologies that put them ahead of others♐ in their industry. In order to stay ahead of competitors, they reinvest profits to develop even newer technologie൲s, and they seek to secure patents as a way to ensure longer-term growth.

Because investors seek to maximize their 澳洲幸运5开奖号码历史查询:capital gains, grow💞t🤪h investing is also known as a capital growth strategy or a capital appreciation strategy.

Evaluating a Company's Potential for Growth

Growth investors look at a company's or a market's potential for growth. There is no absolute formula for evaluating this potential; it requires a degree of individual interpretation, based on objective and subjective factors, plus personal judgment. Growth investors may use certain methods or criteria as a framework for their analysis, but these methods must be applied with a company's particular situation in mind: Specifically, its current position vis-a-vis its past industry performance and historical financial performance.

In general, though, growth investors look at five key factors wh𝓡en selecting companies that may provide capital appreciation. These include:

Strong Historical Earnings Growth

Companies should show a track record of strong earnings growth over the previous five to 10 years. The minimum 澳洲幸运5开奖号码历史查询:earnings per share (EPS) growth depends on the size o𒁏f the company: for example, you might look for growth of at least 5% for companies that are larger than $4 billion, 7% for companies in the $400 million to $4 billion range, and 12% for smaller companies under $400 million. The basic idea is ✱that if the company has displayed good growth in the recent past, it’s likely to continue doing so moving forward.

Strong Forward Earnings Growth

An 澳洲幸运5开奖号码历史查询:earnings announcement is an official public statement of a company’s profitability for a specific period—typically a quarter or a year. These announcements are made on specific dates during earnings season and are preceded by 澳洲幸运5开奖号码历史查询:earnings estimates issu♔ed by equity analysts. It’s these estimates that growth investors pay close attention to as they try to determine which companies are likely to grow at above🍸-average rates compared to the industry.

Strong Profit Margins

A company’s 澳洲幸运5开奖号码历史查询:pretax profit margin is calculated by deducting all expenses from sales (except taxes) and dividing by sales. It’s an important metric to consider b🐈ecause a company can have fantastic growth in sales with poor gains in earnings—which could indicate management is not controlling costs and revenues. In general, if a company exceeds its previous five-year average of pretax profit margins—as well as those of its industry—the company may be a good growth candidate.

Strong Return on Equity (ROE)

A company’s 澳洲幸运5开奖号码历史查询:return on equity (ROE) measur🔴es its profitability by revealing how much profit a company generates with the money shareholders have invested. It’s calculated by dividing net income by shareholder equity. A good rule of thumb is to compare a company’s present ROE to the five-year average R🍌OE of the company and the industry. Stable or increasing ROE indicates that management is doing a good job generating returns from shareholders’ investments and operating the business efficiently.

Strong Stock Performance

In general, if a stock cannot realistically double in five years, it’s probably not a growth stock. Keep in mind, a stock’s price would double in seven years with a growth rate of just 10%. To double in five years, the growth rate must be 15%—somethin🅺g that’s certainly feasible for young companies in rapidly expanding industries.

Growth Investing vs. Value Investing

Some consider growth investing and value investing to be diametrically opposed approaches. Value investors seek "value stocks" that trade below their 澳洲幸运5开奖号码历史查询:intrinsic value or book value, whereas growth investors—while they do co⛎nsider a company's fundamental worth—tend to ignore standard in♚dicators that might show the stock to be overvalued.

While value investors look for stocks that are trading for less than their intrinsic value today—bargain-hunting so to speak—growth investors focus on 澳洲幸运5开奖号码历史查询:the future potential of a company, with mu🐬ch less emphasis on the present stock price. Unlike value investors, growth investors may buy stock in companies that are trading higher than their intrinsic value with the assumption that the intrinsi😼c value will grow and ultimately exceed current valuations.

Those interested in learning more about the growth investing, value investing, and other financial topics ꦫmay want to consider enrolling in one of the best investing courses currently available.

Some Growth Investing Gurus

One notable name among growth investors is 澳洲幸运5开奖号码历史查询:Thomas Rowe Price, Jr., who is known as the father of growth investing. In 1950, Price set up the T. Rowe Price Growth Stock Fund, the first mutua🏅l fund to be offered by his advisory firm, T. Rowe Price Associates. This flagship fund averaged 15% growth annually for 22 years. Today, T. Rowe Price Group is one of the largest financial services firms in the world.

澳洲幸运5开奖号码历史查询:Philip Fisher also has a notable name in the growth investing field. He outlined his growth investment style in his 1958 book Common Stocks and Uncommon Profits, the first of many he authored. Emphasizing the importance of research, especially through networking, it remainsဣ one of the most popular growth investing༺ primers today.

澳洲幸运5开奖号码历史查询:Peter Lynch, manager of Fꦯidelity Investments' legendary Magellan Fund, pioneered a hybrid model of growth and value investing, which is now commonly referred to as "growth at a reasonable price" (GARP) strategy.

Example of a Growth Stock

Amazon Inc. (AMZN) has long been considered a growth stock. In 2021, it remains one of the largest companies in the world and has been for some time. As of Q1 2021, Amazon ranks in the top three U.S. stocks in terms of its 澳洲幸运5开奖号码历史查询:market capitalization.

Amazon's stock has historically traded at a high price to earnings (P/E) ratio. Between 2019 and early 2020, the stock's P/E has remained upwards of 70, moderating to around 60 in 2021. Despite the company's size, 澳洲幸运5开奖号码历史查询:earnings per share (EPS) growth estimates for the next five years still hover near 30% per year.

When a company is expected to grow, investors remain willing to invest (even at a high P/E ratio). This is because several years down the road the current stock price may look cheap in hindsight. The risk is that growth doesn't continue as expected. Investors have paid a high price expecting one thing, and not getting it. In such cases, a growth stock's price can fall dramatically.