Growth stock

In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry.[1] A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects.

Criteria

Analysts compute Return on equity (ROE) by dividing a company's net income into average common equity. To be classified as a growth stock, analysts generally expect companies to achieve a 15 percent or higher return on equity.[2] CAN SLIM is a method which identifies growth stocks and was created by William O'Neil a stock broker and publisher of Investors Business Daily.[3]

Growth vs. Value investing

Since 1982, the growth stocks have beaten value stocks during:[4]

  • 1982
  • 1985
  • 1987
  • 1989-91
  • 1995-99
  • 2007
  • 2010 [5]

During the rest of the years, the value stocks have done better. Note that the 5 years preceding the dot-com bubble burst, growth stocks did better than value, since then value stocks have generally done better.

Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.[6]

See also

References
  1. "Top Growth Stocks". InvestingDaily.com. Retrieved 2010-06-03.
  2. "Sivy on Stocks". CNNMoney.com. 2004-08-06. Retrieved 2004-08-18.
  3. O'Neil, William J. (2002). How to Make Money in Stocks: A Winning System in Good Times or Bad. The McGraw-Hill Companies. ISBN 978-0-07-137361-6.
  4. "Growth vs. Value: Two Approaches to Stock Investing". TDAmeritrade. Archived from the original on March 2, 2009. Retrieved 2008-06-13.
  5. Russell Investments: Russell U.S. Indexes daily total returns. http://www.russell.com/Indexes/data/US_Equity/Russell_US_index_returns.asp
  6. "Multi-Style Investing: A Tale Of Two Investment "Styles"". Bernstein Global Wealth Management. 2004-07-22. Archived from the original on 2012-09-07. Retrieved 2009-08-20.


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