Track Any Stock Instantly
Just enter up to ten of your stocks in the Stock Tracker box, click the ADD
button beside any of Today's Hot Stocks, or click ADD beside any of the stocks
you've Recently Viewed.
Click ADD next to any stock below to add it to the Stock Tracker
Stock Strategies
Buying Stocks Using Growth Strategy
by InvestorGuide Staff (Write for us!)
(Click on the links within the article to get definition of that word)
Millions of investorsply their skills in
the market each year with the hopes of picking a winner - that
diamond-in-the-rough company that far exceeds everyone's expectations. While the historicalgrowth of the stock
market may very well hover around 10 percent (when you look back 40 or more years), the year-to-year changes in
the prices of stocks vary significantly. For those who fail to accurately predict a downturn in the economy or
stock market, the financiallosses can be staggering. But for those precious few whose hearts seem to beat in tune
with the stock market, the profits can be limitless. A number of investment strategies for stocks currently exist,
and one of the most popular is the growth strategy.
Most investors have two things in common: they are all trying to make the largest profit in the shortest amount
of time; and they are all trying to do so by predicting that the future prices of the stocks they purchase
today will be higher - the higher the better! Those with more patience and time to invest can easily choose the
low-risk path of buy and hold stock purchasing - basically, buy stocks at the lowest prices possible today and hold
onto them until a significant return can be obtained in the future - at least 1 or more years down the road. Buying stocks
using this strategy is fairly safe, but the growth tends to be lower than can be obtained by using some other
methods, such as the growth strategy.
Investors who employ the growth strategy are basically looking at one thing: What is this company's potential for
future earnings? The underlying assumption behind the growth investment strategy for stocks is that increased
earnings will lead to higher stock valuations. In turn, this should also bring about higher dividends which mean
higher revenue streams and larger capital gains when the stocks are liquidated. While current or past earnings are
indicators, they do not necessarily tell the entire tale as far as the growth strategy is concerned. Other factors to
be considered when using this strategy to make stock purchase decisions are annual growth, overall revenue, and earnings
pershare.
Earnings
Investors
always want to know what the future holds and one of the best indicators of the potential of a company is
their previous earnings. The overall sales, or gross revenue, of a business are not equal to their earnings. Instead,
earnings are determined by taking the gross revenue and subtracting the costs associated with selling the products,
operating expenses including labor costs, and any and all applicable taxes. While earnings may in fact be the largest
singlefactor in determining the prices of stocks, they are not necessarily the best indicators of potential growth.
It is often the case that many smaller businesses trying to make a breakthrough will invest more to secure larger
future profits in the future at the expense of current profits. These companies will often have stocks that are under
valued and perfectly positioned to see a huge surge in growth, sales, and overall profits in the near future.
Growth investors love companies such as these and will gladly seek out opportunities to add such stocks to
their portfolio. The trick is to catch these companies while their stock prices are still low but they are just
on the verge of making a major breakthrough in sales and market presence.
Knowing the earnings of a company is important to a growth investor because they can be used to calculate the
price/earning ratio, or P/E ratio. When looking through the business section of a newspaper, you may notice that
some companies do not have a P/E ratio. This is because they were not profitable the previous year and therefore
will not have any earnings - instead they suffered losses.
The P/E ratio of stocks is important for growth investors because it is a good indicator of how much the market
is willing to pay for a certain rate of growth. Those companies with a higher P/E ratio are those that
investors are willing to take greater risks with. The P/E ratio is calculated as follows:
So what does this ratio tell the average growth investor when trying to decide which stocks to invest in?
Well, let's say that the market value of a business was valued on a per share basis at $20 each.
If the after-tax earnings amounted to only $2 per share, then the P/E ratio would be 10.
Is that a good or a bad thing?
Companies with a higher P/E ratio have a relatively high market valuation with
relatively low earnings.
Therefore, they are considered to be greater risks than those companies whose market value is more in line
with earnings - or those with a lower P/E value. Such businesses which have high P/E ratios have high expectations
placed upon them and it is therefore easy to buy-into a company and pay relatively high prices for the stock only
to see it plummet once earnings are reported the following quarter.
P/E ratios are especially useful for growth investors who need to compare companies from the same industry.
In more established industries, the P/E ratio will be more of a constant and newer companies with especially
high P/E ratios should be treated with caution. In other words, the market value of the company should ideally
be tied to earnings. While companies with lower earnings may be poised for a breakthrough in the market,
analyzing the P/E ratios of similar companies from the same industry will nonetheless help when making
stock purchase decisions.
Choosing Growth Stocks
So how does one go about identifying and selecting these companies? Are growth investors only to search out small
companies with poor earnings in order to identify those businesses on the verge of a breakthrough?
While some growth companies are in fact identified in this manner, there is an easier way to find growth stocks:
by dividing the price per share by the book value per share. The price per share figure is simple enough to find:
it is the number listed in the paper Monday through Friday with the closing prices of stocks listed on various exchanges.
The book value per share, however, is a little tougher to figure out.
The book value per share is calculated by taking the total stockholder equity and subtracting the preferred stock
that has been issued. This number is then divided by the common shares which are still outstanding. The result is
the book value per share of the company. A comparison of the book value per share with the market value can help
in determining if a stock is under or over valued. Growth companies will tend to have stock that is under valued
as they tend to have greater capital expenditures and debtloads.
If you were to take the S&P 500 Index and take each company's per share price and divide it by the book value per
share, then you would end up with a new ratio. Then, if you ranked those companies by this new ratio with the
larger numbers being first on the list, you would then be able to identify growth companies.
Those companies in the top third of the list would be considered growth companies. However, this is not an exact
science but it is a helpful tool when considering stock investmentoptions favoring growth companies.
Growth companies will typically be newer companies. They may be large-capinvestments but the tendency
is for them
to be small (less than $1 billion in sales) or mid-cap (company sales between $1 and $10 billion) investments.
However, the common variable is that the companies have a higher-than average expectation of outperforming the
rest of the market. They tend to command a higher per share price for stock than older, more established companies
like General Motors. It is also true that growth companies, being younger, also tend to have less pension/benefits
liabilities than companies like GM and therefore tend to be more profitable, which in turn, of course, tends
to send stock prices higher. This is the reason why growth stocks are so coveted and why people devote themselves
to finding formulas that can help identify them sooner than anyone else.
Growth companies will also tend to have, as mentioned earlier, higher P/E ratios. The high expectations placed
on such companies are occasionally not met and the resulting crash in stock prices is precisely what makes them
so risky. Intel is a perfect example of a growth company which still has a very bright future but which no
longer seems to meeting the high demands of its investors.
Since its peak in 2000, Intel has failed to move beyond half of that magical peak in over half a decade. Once a
growth company fails to meet the high expectations of investors, a more realistic and sustainable per share
price will settle in for the stock. Since Intel has been hovering at around half of its former peak in 2000 for
over five years, two things are possible: either the company is now correctly valued and was grossly overrated
in the past or; the company is currently under valued and poised for a strong rebound in the near future.
In the first case, Intel is still a growth stock but with less potential than in years past. In the latter,
Intel is a value stock and should be purchased as it will probably outperform expectations at some point
in the future and thus be a profitable investment.
How to use this tool 
How to use this tool 
Print Article
