Growth Investing
Candlefocus EditorWhile value investors take a more competitive approach, aiming to buy stocks at bargain prices, growth investors focus on identifying companies that have the potential to grow faster than the average company and provide profits for shareholders. In pursuit of long-term gains, these investors search for firms with superior earnings growth, higher profit margins and returns on equity, and sound corporate strategies that are expected to lead to strong share-price performance.
Growth investors don't necessarily pick the best stocks on the market. Rather, they’re looking for stocks of companies with well-defined competitive advantages, a history of consistent growth and promising future prospects. Growth investing does carry some risk since fast-growing companies can be more volatile and susceptible to market declines.
Investors seeking to apply growth stock-buying strategies typically examine five key performance factors: earnings growth, expanding profit margins, returns on equity (ROE), share price performance, and a strong corporate strategy. Positive earnings growth is considered a cornerstone of growth investing as it indicates a company’s ability to deliver sustained returns to shareholders. The ROE ratio measures the percentage of net income a company produces relative to the equity of its shareholders. Companies that have consistent, positive ROE tend to be those that generate strong cash flows, allowing them to finance new projects and acquire other companies, further driving growth and profits.
Growth investors also look for companies whose stock prices are outperforming their industry, despite volatile market conditions and uncertainty. When analyzing a company’s corporate strategy, growth investors pay close attention to management changes and new product launches, as these can be indicators of possible growth in the future.
At its core, growth investing seeks to uncover companies with the potential for long-term capital appreciation rather than buying stocks at bargain prices and waiting for a higher return. By focusing on companies poised for future growth, growth investors can potentially benefit from superior returns and less of the risk associated with value investing.