Growth Investing

Growth investing is an investment strategy focused on acquiring shares in companies that are expected to grow at an above-average rate compared to their industry or the overall market. Growth investors look for stocks that exhibit strong potential for future earnings growth, even if their current valuation appears high.

Key Characteristics of Growth Investing

• Focus on Earnings Growth: Growth investing primarily targets companies with high potential for future earnings growth. These companies are often in innovative industries or sectors.
• High Price-to-Earnings (P/E) Ratios: Growth stocks typically have higher P/E ratios than the market average, reflecting investor expectations for significant growth.
• Reinvestment of Earnings: Growth companies often reinvest their profits back into the business rather than distributing them as dividends. This reinvestment is aimed at fostering further expansion.
• Volatility: Growth stocks can be more volatile than value stocks, with prices that may fluctuate significantly based on market sentiment and growth prospects.

How to Identify Growth Stocks

Growth stocks can be identified through various metrics and qualitative factors:

• Revenue Growth Rate: Evaluate historical and projected revenue growth rates to identify companies that have maintained or surpassed industry averages.
• Earnings Per Share (EPS) Growth: Look for companies with a consistent track record of increasing EPS year over year.
• Market Position: Consider the company’s position in its industry, product offerings, and growth plans.

Example of Growth Investing

Consider a hypothetical company, TechInnovate, which has been developing cutting-edge technology products. TechInnovate’s financials show:

• Current Year Revenue: $100 million
• Next Year Projected Revenue: $130 million
• Current Year EPS: $2.00
• Project EPS Next Year: $2.60

In this case:

– Revenue Growth Rate Calculation:

Revenue Growth Rate = (Next Year Revenue – Current Year Revenue) / Current Year Revenue
= ($130 million – $100 million) / $100 million
= 0.30 or 30%

– EPS Growth Rate Calculation:

EPS Growth Rate = (Projected EPS Next Year – Current Year EPS) / Current Year EPS
= ($2.60 – $2.00) / $2.00
= 0.30 or 30%

Given that TechInnovate has demonstrated a 30% revenue growth rate and a 30% EPS growth rate, a growth investor might find TechInnovate appealing due to its significant potential. If the stock is currently trading at a P/E ratio of 40, growth investors believe that the company’s promising future justifies this high valuation.

By investing in companies like TechInnovate, growth investors aim to benefit from future share price increases as the companies grow and evolve.