{"id":957,"date":"2010-10-16T20:45:05","date_gmt":"2010-10-17T00:45:05","guid":{"rendered":"http:\/\/thestockmarketwatch.com\/learn-stock-market\/?p=957"},"modified":"2016-04-26T14:41:39","modified_gmt":"2016-04-26T18:41:39","slug":"stock-picking-strategies-growth-investing","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/stock-picking-strategies-growth-investing\/","title":{"rendered":"05) Stock Picking Strategies: Growth Investing"},"content":{"rendered":"

When the technological boom happened in the late 90’s, it gave rise to growth investing and\u00a0 gave investors unprecedented returns.\u00a0 But before you join the growth investment market, here are some things you need to know.<\/p>\n

Growth VS Value<\/strong><\/p>\n

Let’s compare growth investing to value investing to better understand the latter.\u00a0 Value investing is focused on the current.\u00a0 It looks for companies that trade below their actual value.\u00a0 Growth investors, are the opposite, they look towards the future value or potential of a company.\u00a0 Its current value is not an issue.\u00a0 Growth investors look for companies that trade higher than their intrinsic value.\u00a0 For them, they believe that the company’s worth will grow and will therefore exceed their current prices.<\/p>\n

Growth investors look at young companies and how much they grow compared to others.\u00a0 In theory, a young company’s rapid growth translates to more profits and revenue which in turn means an increase in their stock price.\u00a0 Growth investors look towards the new technology industry. Profits are realized through capital gains and not dividends.<\/p>\n

Formula<\/strong><\/p>\n

Growth investors do not rely on a formula for their stock picking.\u00a0 They are more concerned about a company’s future growth potential.\u00a0 Picking growth stocks is usually a combination of individual interpretation and judgment.\u00a0 Investors look at a company’s past performance in relation to the industry’s performance and this usually serves as a basic guideline for growth investors.<\/p>\n

NAIC<\/strong><\/p>\n

The National Association of Investors Corporation (NAIC) teaches growth investment.\u00a0 They teach investors how to invest wisely. Here are some of their guidelines in picking growth stocks:<\/p>\n

1.\u00a0\u00a0\u00a0 Strong Historical Earnings Growth<\/p>\n

Has the company been growing in the past?\u00a0 According to the NAIC, this should be the first question a growth investor asks.\u00a0 if the company displays good growth over the last 10 year period, then it is likely to do so over the next 5-10 years.<\/p>\n

2.\u00a0\u00a0\u00a0 Strong forward earnings growth<\/p>\n

The NAIC projects that a growth of 10-12% is good but 15% or more is ideal.\u00a0 The big problem however is that these figures are usually estimates.\u00a0 So before trusting an estimate, an investor should first look into its credibility.\u00a0 This requires knowledge in the different growth rates of companies in different industries.<\/p>\n

3.\u00a0\u00a0\u00a0 Is management controlling cost and revenue?<\/p>\n

Look at\u00a0 a company’s pre-tax profit margin.\u00a0 High revenue growth is good but if EPS does not increase proportionately, this is probably due to low profit margin.<\/p>\n

By comparing past profit margins an investor can have a good gauge whether or not management is controlling cost and revenue and profit margin.\u00a0 A good rule of the thumb: companies that exceed their previous 5 years pretax profit margin as well as those in the industry are good buys.<\/p>\n

4.\u00a0\u00a0\u00a0 Can management operate the business efficiently?<\/p>\n

Compare ROE or return on equity.\u00a0 Efficient use of assets should be reflected in a solidly increasing ROE.\u00a0 \u00a0Take a look at the past 5 years’ ROE and compare to the industry.<\/p>\n

5.\u00a0\u00a0\u00a0 Can the stock double in 5 years?<\/p>\n

If a stock cannot double in 5 years, then this is not a growth stock.\u00a0 Remember that growth investors look to 15% growth per annum, which means a doubling in price in five years.<\/p>\n

Conclusion<\/strong><\/p>\n

Growth investors are concerned with, obviously, growth.\u00a0 They look for a company’s potential to grow and expand.\u00a0 This ensures that the company pays off in the future.<\/p>\n