Growth stock

Shares in a company whose earnings are expected to grow at an above-average rate relative to the market.

Also known as a "glamor stock".

Investopedia Says:
A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. Most technology companies are growth stocks.

Note that a growth company's stock is not always classified as growth stock. In fact, a growth company's stock is often overvalued.

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Stock of a corporation that has exhibited faster-than-average gains in earnings over the last few years and is expected to continue to show high levels of profit growth. Over the long run, growth stocks tend to outperform slower-growing or stagnant stocks. Growth stocks are riskier investments than average stocks, however, since they usually sport higher price/earnings ratios and make little or no dividend payments to shareholders. See also Price/Earnings Ratio.

Said of shares of young companies with little or no earnings history. They are valued on the basis of anticipated future earnings and thus have high price-earnings ratios. They generally grow faster than the economy as a whole and also faster than the industry of which they are a part. They are risky because capital gains are speculative, especially in the case of young companies in new industries. An example of a growth stock is a high-tech company.

The stock of a company which has achieved above-average earnings growth in the past and has good prospects for continued increases in the future. Growth companies generally have other characteristics in common, including above-average profit margins and return on shareholder's equity, above average expenditures for product development and research, and patented and/or proprietary products. Markets served by growth companies are typically large and expanding and the company is usually a dominant force in the markets it serves. Earnings reinvestment in the business is high resulting in low dividends. Initially, capital appreciation potential is the primary attraction of growth stocks for investors. If above-average growth continues for a long enough period, dividend payouts compared to original cost of purchased stock can become substantial.

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In finance, growth stocks are stocks belonging to companies that have shown high growth (e.g. in earnings) in the past and, it is hoped, will continue to grow, leading to good investor returns.

Contents 1 Criteria 2 Growth vs. Value investing 3 See also 4 Footnotes 5 External links 6 References

Criteria

Analysts compute ROE by taking the company's net income and dividing it by the company's equity. To be classified as a growth stock, analysts expect to see at least 15 percent return on equity.^{[citation needed]} CANSLIM is a method which identifies growth stocks and was created by William O'Neil a stock broker and publisher of Investment Business Daily. ^[1]

Growth vs. Value investing

Since 1982, the growth stocks have beaten value stocks during:^[2]

• 1982
• 1985
• 1987
• 1989-91
• 1995-99
• 2007

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.^[3]

See also

• Finance
• Financial ratios
• P/E ratio
• Turnaround stock
• Value stock

Footnotes

1. ^ O'Neil, William J. (2002). How to Make Money in Stocks: A Winning System in Good Times or Bad. The McGraw-Hill Companies. ISBN 9780071373616. 
2. ^ "Growth vs. Value: Two Approaches to Stock Investing". TDAmeritrade. http://planning.tdameritrade.com/srl/tda/library_article.jsp?tid=0039&client=tda&catid=000646. Retrieved 2008-06-13. 
3. ^ "Multi-Style Investing: A Tale Of Two Investment "Styles"". Bernstein Global Wealth Management. 2004-07-22. http://www.bernstein.com/public/story.aspx?cid=744&nid=185. 

External links

• Introduction to Growth Investing
• Ratios converge between growth and value stocks
• How to Find the Ultimate Growth Stock
• DuPont: Despite Earnings Miss, Still a Growth Stock

References

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