The greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than the industry as a whole once said Philip Fisher. I totally agreed. Fisher’s philosophy in investing usually referred to as growth investing, is based on finding outstanding companies and staying with them through all the fluctuations of a gyrating market.
Growth investing is investing in stocks of companies whose earnings are expected to grow at a higher than normal rate over a certain period of time, and not only for the next quarter or next year time frame. In example, while many might think of a companies such as Microsoft, Intel and others. This might relate to high tech companies but not entirely correct, some not so high tech companies are also considering growth companies such as Wal-Mart, Coca-Cola and Starbucks. Thus, investing in high-tech companies sector is not synonym with growth investing but these high tech stocks normally contains very high risk thus providing very high profitability and accountability if you know how to evaluate them correctly.
Growth investing is rather conventionally different from value investing as we discuss before. When an investor buys a stock primarily because his conviction that a company would grow for many years in the future, he is a growth investor. However, many investors believe that when value investing works, growth investing does not work and vice versa. But i personally think this is not quite true as you can look at the Coca-Cola stocks in Berkshire portfolio, it seems to be a result of growth investing strategy from Buffett. Coca-Cola at that time already had a proven track record and those kind of stocks do not come in cheap and or has a low P/E ratio but the Cola-Cola has the most fundamental requirement in value investment strategy, that’s the company selected should be large, prominent and conservatively financed. Thus the Coca-cola consist of value and growth investment strategy if you have been surveying and analyse correctly. An investor would only buy the stock if he is convinced of its continue growth and not based on value investing strategy of fundamental calculation.
Growth investing is harder to analyse as it is not based on quantitative formulas such as P/E or M/B ratios as perform in the stock analysis. The price may already reflect it’s potential growth, it can be an expensive stock with high PE as such that happen to Google’s P/E ratio is about 30 even though the price has decline over 30% in year 2009. Secondly, the judgement of the investor may be wrong. However, if an investor selects stocks based on accurate assessment, growth investment can be very lucrative.
Growth Investing-how to identify
To find a great growth stock business, you need to evaluate it from the point of view from a customer. The success of a business, and hence it’s growth is very much depends on its customers. Once you are satisfied that the company’s sales and earnings well continue to grow and that you can buy at reasonable price and hold it for a long time. According to Sam Walton, owner of Wal-Mart which has been a great growth stocks over the years yielding 80,000 percent return over a 38 year period of time since 1970 said: ” There is only one boss-the customer”.
The most important drive factor for a growth investing is growth in earnings. Future earnings growth usually reflects from past earnings, try to look at the track record of a company that you are targeting. Growth in earnings however depend on growth in sales and this make perfect sense as sales generate earnings, especially in the long run. In general, it is best to keep in mind that both sales and earning are the main driver for growth investing.
Some qualitative questions that is good for you to analyse:
- Any potential in grow sales and earning for years to come?
- How is the Research and Development of the company?
- How does the company respond to challenge?
- The company management quality?
- Profit margin of the company?
In general, to find a promising and good growth stock, start by examining the earnings of a company for several years. Because companies that have grown strongly on several years on average are good opportunities to generate good earnings in the future as well. Overall, in order to success in growth investing, you will have a very good knowledge of the company’s business and ability to forecast it’s earnings well. Do you have the ability to do so?