Growth Investing StrategyA growth investing strategy involves buying companies that are growing fast. This often means looking at smaller to medium companies.Let’s consider growth investing strategy . . . Why growth investing worksEveryone wants a piece of the action. A stock with superb growth prospects, excellent financial health, expanding profitability, and a steadily growing stock price tends to attract the attention of professional investor’s - the fund managers, bankers etc. These are the people who move the market.The trick is to get into the stock before the big players get on board. And eventually to get out before the movers and shakers decide to sell their positions. Tactics of growth investingScreen for companies with year-on-year and three year growth in sales and earnings of at least 20% (or so). And a return on capital (ROC) of at least 10% (10% is an arbitrary value) in order to find some potential winners.Require earnings growth to be accompanied by sales growth. There are a couple of reasons for this. We want a company’s growth to be driven by sales, not by outside interests. Sales is a better measure of growth than earnings. Sales is a much “cleaner” figure from an accounting perspective than earnings. Monitor your stocks very closely after you buy them. Take particular note of when the next earnings figures are due to be released. Read all company announcements when they become available. You want to keep a close eye on the information that might affect your stock’s performance. Only invest in financially healthy companies. Financially strong companies have flexibility. Stay away from companies growing by acquisition as acquisitions rarely deliver value. Instead, look for companies that are growing “organically” (meaning from their core operations). Buy the leaders in the strongest market sectors. The leaders will have strong sales, cash flows, and return on capital (ROC). Learn the basics of technical analysis. You need to be able to:
Don’t be overly fussed with technical indicators. With perhaps the exception of the relative strength indicator. Relative strength is commonly used to give a trader a measure of how strong a stock’s price movement is with regard to its index. Advantages of growth investingGrowth stocks can continue to rise for many years. There may be “corrections” (drops in the share price) or consolidation periods if the stock has risen too far above its earnings. And these can be opportunities for an investor to get on board and go for a ride.There are tax advantages to holding a stock for more than 12 months (you will need to confirm this for yourself depending on which country you reside in). A growth investing strategy can be combined with value investing concepts to give your performance a lift and limit your downside risk. GARP stands for Growth At a Reasonable Price. It involves buying growth companies when they’re cheap. Disadvantages of growth investingIf a growth company doesn’t meet analyst earnings estimates, the stock price quite often takes a tumble. This is one aspect of the growth investing strategy that can be quite annoying.Growth stocks can fall very quickly if they fall out of favor with the market. Statistically, stocks tend to take a long time to rise, but fall very quickly. Growth investors need to be “active” investors. They need to keep a close eye on their stocks. It’s particularly important to keep track of how the industry the stocks operates in is fairing. As I already mentioned in the tactics section, you’ll want to read all official company announcements as they become available. Who uses growth investing as a strategy?
Stock market strategies: Fundamental Analysis – the company’s financial numbers and its story Technical analysis – examining stock charts and technical indicators Value Investing – buying good companies at the right time Growth investing – buying companies that are growing fast Income investing – buying companies for their dividends Index investing – buying into a stock market index fund
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