What is Growth Investing

Growth investing style is highly attractive to many investors as buying stocks of growing companies can give you amazing profits. Read the article to know the guidelines for choosing growth stocks.

Publish Date: May 06th, 2018

By: Sandhya Kannan, Head – Content

In the world of stock investments, the amount of profits you earn largely depends on how well you have strategised your portfolio. Strategising investments are one of the smartest ways to make money in the stock market. One such strategy, we are introducing here is ‘growth investing’. Some of the world’s famous investors like Thomas Rowe Price and Philip Fisher followed this style & strategy in their investments. So, let’s understand growth investing in detail.

Basics of Growth Investing

Growth investing is an investment style and strategy that at its core seeks to achieve a capital appreciation for its investors. It involves investing in companies or industries that are growing and are expected to grow significantly over a substantial period of time. Typically, growth investors invest in growth stocks whose earnings are expected to grow at an above-average rate compared to the overall market.

Growth investors seek out sectors or companies that have growth potential, even if their stock prices are high in terms of their price-to-earnings ratios and price-to-book ratios. Investors investing in growth stocks look for companies that are more likely to reinvest their profits in expansion projects, instead of using them to pay out dividends to stockholders

Generally, in investments, growth investing is looked as offensive rather than defensive investing. Defensive investing means that investments that generate passive income and work towards providing capital protection. In contrast, growth investing means an active way to generate more wealth from the wealth you invested.

Growth investing is said to be riskier than other types of investment strategies. Shares of growth companies can be highly volatile. Therefore, this investing strategy may not be suitable for everyone.

Growth companies usually carry very high valuations compared with current levels of profitability, in the expectations that profits will grow rapidly.

What to look for in Growth Investing?

Here are certain guidelines for what an investor can seek to look for in potential growth companies to be incorporated in its growth investing strategy. But, note that these guidelines should be assessed in relation to a company’s particular situation. This means that an investor should consider the company in relation to the industries’ or sectors’ past performance.

• Annual sale growth ratio:

  This indicates the growth rate of a company on a yearly basis. This parameter indicates that one should look for the stocks of companies whose sales growth are stable and consistent every year. This indicates the financial health of the company. A company with a strong product line or services is a must.

• Year-on-Year (YoY) quarterly sales growth:

  This is very simple to understand. Investors should look for stocks that show an increase in sales for a quarter in comparison to the same quarter in the previous year. A company with constant growth in sales can be promising.

• Increase in quarterly Earning Per Share (EPS):

  Earning per share is also called net income per share, which measures the amount of net income earned per share of the Company’s stocks. In this parameter, you can compare the company’s EPS for the quarter to the previous quarters. Similarly, you can compare the current annual EPS to its previous year’s EPS. The EPS should be consistent.

• Quarterly EBITDA growth YoY:

  Earnings before interest, tax, depreciation, and amortization (EBITDA) measure the company's operating performance. It gives a clear view of how much cash a company is generating from its business.

• Cash flow from operations:

  This parameter indicates whether the company is generating sufficient cash flows from its operations, which signifies the financial strength of the company.

Growth Investing Vs Value Investing

Value investing strategies are the opposite of growth investing strategies. Value investors look for companies that are not currently performing or have fallen out of favour, but have good fundamentals. Investors who follow such a strategy may also buy stocks of startups with good potential.

Many investors want to know which of these strategies work well. Well, the success of either of these strategies is based on certain factors such as the interest rate movements, the economic cycle, market cycles, etc.

Value stocks may outperform during economic growth, while growth stocks do well when economic growth is decelerating.

Ideally, value stocks have strong existing cash flows, which at a time drives investors toward them when interest rates rise. Whereas, growth stocks are valued on future earnings, which may make investors sceptical of their future earnings.

It is said that a bullish market might be good for growth stocks, and value stocks fare better in a bearish market.

If we talk about both the style of investing- value & growth, they have their own pros and cons. Ideally, investors should look at both the strategies as they can help to generate returns in different markets.

Smart Tips for Growth Investing

Investors looking to follow the growth investing style, here’re some of the tips to follow.

1. Buy stocks with strong RP

RP is relative performance studies that typically identify successful companies. Investors should focus on buying stocks of those companies that are consistent in outperforming the market.

2. Invest in growing companies

You should identify companies that belong to sectors that are fast-growing. For instance, technology is one of the fast-growing sectors in India. Remember, the potential is there where the growth is.

3. Diversify your portfolio

Well, this is the rule of investment! No matter where you invest, how you invest, make sure your portfolio is well-diversified! This is a key to secure your investment from risk.

4. Take long-term view

As an investor, you should make the most of the power of compounding. The compound growth can make your returns grow exponentially. But, you need to stay invested for the long-term. So, make sure you stay invested for a longer time horizon.

5. Be patient

In the world of investment, time is your friend. The more time you give to your investments, the more potential returns you can earn. Mostly, stocks don’t deliver returns fast, they take time. So, as an investor one of the important qualities you need to develop is patience! So, keep calm and let your stocks perform.

Conclusion

Ideally, investors should consider growth stocks as part of their long-term strategy. Before investing in a company, look at the strength of the company. Buy shares only if you believe in the future performance of the company on the basis on product & services, and other parameters as discussed above. Research all aspects and make a smart investment decisions.

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