Growth stock

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In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. [1] A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects.

Finance academic discipline studying businesses and investments

Finance is a field that is concerned with the allocation (investment) of assets and liabilities over space and time, often under conditions of risk or uncertainty. Finance can also be defined as the art of money management. Participants in the market aim to price assets based on their risk level, fundamental value, and their expected rate of return. Finance can be split into three sub-categories: public finance, corporate finance and personal finance.

Stock financial instrument

The stock of a corporation is all of the shares into which ownership of the corporation is divided. In American English, the shares are commonly known as "stocks." A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

Cash flow movement of money into or out of a business, project, or financial product

A cash flow is a real or virtual movement of money:

Contents

Criteria

Analysts compute Return on equity (ROE) by dividing a company's net income into average common equity. To be classified as a growth stock, analysts generally expect companies to achieve a 15 percent or higher return on equity. [2] CAN SLIM is a method which identifies growth stocks and was created by William O'Neil a stock broker and publisher of Investors Business Daily. [3]

In corporate finance, the return on equity (ROE) is a measure of the profitability of a business in relation to the equity, also known as net assets or assets minus liabilities. ROE is a measure of how well a company uses investments to generate earnings growth.

CAN SLIM refers to the acronym developed by the American stock research and education company Investor's Business Daily (IBD). IBD claims CANSLIM represents the seven characteristics that top-performing stocks often share before making their biggest price gains. It was developed in the 1950s by Investor's Business Daily founder William O'Neil. The method was named the top-performing investment strategy from 1998-2009 by the American Association of Individual Investors. In 2015, an exchange-traded fund (ETF) was launched focusing on the companies listed on the IBD 50, a computer generated list published by Investors Business Daily that highlights stocks based on the CAN SLIM investment criteria.

William J. O'Neil is an American entrepreneur, stockbroker and writer, who founded the stock brokerage firm William O'Neil & Co. Inc in 1963 and the business newspaper Investor's Business Daily in 1983. He is the author of the books How to Make Money in Stocks, 24 Essential Lessons for Investment Success and The Successful Investor among others, and is the creator of the CAN SLIM investment strategy.

Growth vs. Value investing

Since 1982, the growth stocks have beaten value stocks during: [4]

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.

Dot-com bubble historic speculative bubble covering roughly 1997–2000

The dot-com bubble was a historic speculative bubble and period of excessive speculation mainly in the United States that occurred roughly from 1995 to 2000, a period of extreme growth in the use and adoption of the Internet.

Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach. [6]

See also

Financial ratio characteristic number

A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.

A turnaround stock is a share with a high P/E ratio but low price-to-book ratio.

Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. The various forms of value investing derive from the investment philosophy first taught by Benjamin Graham and David Dodd at Columbia Business School in 1928, and subsequently developed in their 1934 text Security Analysis.

Related Research Articles

Fundamental analysis analysis of a businesss financial statements

Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements ; health; and competitors and markets. It also considers the overall state of the economy and factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management. There are two basic approaches that can be used: bottom up analysis and top down analysis. These terms are used to distinguish such analysis from other types of investment analysis, such as quantitative and technical.

To invest is to allocate money in the expectation of some benefit in the future.

Price–earnings ratio

The price/earnings ratio is the ratio of a company's share (stock) price to the company's earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.

Valuation (finance) process of estimating what something is worth, used in the finance industry

In finance, valuation is the process of determining the present value (PV) of an asset. Valuations can be done on assets or on liabilities. Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.

The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant. It is often expressed as a percentage.

In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will overall rise in value, while overvalued stocks will generally decrease in value.

The'PEG ratio' is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth.

Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index or target return. In passive management, investors expect a return that closely replicates the investment weighting and returns of a benchmark index and will often invest in an index fund.

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest. In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation.

In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate. Some choices involve a tradeoff between risk and return. Most investors fall somewhere in between, accepting some risk for the expectation of higher returns.

Fed model

The "Fed model" is a theory of equity valuation that has found broad application in the investment community. The model compares the stock market’s earnings yield (E/P) to the yield on long-term government bonds. In its strongest form the Fed model states that bond and stock market are in equilibrium, and fairly valued, when the one-year forward-looking earnings yield equals the 10-year Treasury note yield :

Financial statement analysis

Financial statement analysis is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of changes in equity. Financial statement analysis is a method or process involving specific techniques for evaluating risks, performance, financial health, and future prospects of an organization.

Relative valuation also called valuation using multiples is the notion of comparing the price of an asset to the market value of similar assets. In the field of securities investment, the idea has led to important practical tools, which could presumably spot pricing anomalies. These tools have subsequently become instrumental in enabling analysts and investors to make vital decisions on asset allocation.

<i>Stocks for the Long Run</i> book by Jeremy Siegel

Stocks for the Long Run is a book on investing by Jeremy Siegel. Its first edition was released in 1994. Its fifth edition was released on January 7, 2014. According to Pablo Galarza of Money, "His 1994 book Stocks for the Long Run sealed the conventional wisdom that most of us should be in the stock market." James K. Glassman, financial columnist for The Washington Post called it one of the 10 best investment books of all time.

Stock market index method of measuring the value of a section of the stock market

A stock index or stock market index is a measurement of a section of the stock market. It is computed from the prices of selected stocks. It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends, and what amount, is determined mainly on the basis of the company's unappropriated profit and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.

Factor investing is an investment approach that involves targeting quantifiable firm characteristics or “factors” that can explain differences in stock returns. Over the last 50 years, academic research has identified hundreds of factors that impact stock returns. Security characteristics that may be included in a factor-based approach includes size, value, momentum, asset growth, profitability, leverage, term and carry.

References

  1. "Top Growth Stocks". InvestingDaily.com. Retrieved 2010-06-03.
  2. "Sivy on Stocks". CNNMoney.com. 2004-08-06. Retrieved 2004-08-18.
  3. O'Neil, William J. (2002). How to Make Money in Stocks: A Winning System in Good Times or Bad. The McGraw-Hill Companies. ISBN   978-0-07-137361-6.
  4. "Growth vs. Value: Two Approaches to Stock Investing". TDAmeritrade. Archived from the original on March 2, 2009. Retrieved 2008-06-13.
  5. Russell Investments: Russell U.S. Indexes daily total returns. http://www.russell.com/Indexes/data/US_Equity/Russell_US_index_returns.asp
  6. "Multi-Style Investing: A Tale Of Two Investment "Styles"". Bernstein Global Wealth Management. 2004-07-22.