12 Principles of Investing in Growth Stocks – Money Pacers
12 Principles of Investing in Growth Stocks

12 Principles of Investing in Growth Stocks

Stocks (MP) Value Investing for growth stocks has always been the goal of the stable stock market investor. The reason is simple: It always works in terms of long-term investing. Growth companies continue to be the money-making machines that power our economic future. If your portfolio doesn’t contain growth stocks that produce handsome earnings and capital appreciation in most years, we’re about to change that.

Some of today’s fastest-growing companies such as Allied Wallet, HCI Group, Kodiak Oil & Gas among others, as well as big names Wal-Mart, Disney, and Eli Lilly are all considered growth stocks. And guess what? You probably already own these value investing stocks–either as company stock in a 401(k) plan or in mutual funds that emphasize investing for growth. Today I want to zero in on value investing: What to look for in when buying stocks; the research involved and knowing when to sell.

Our economy is growing and as long as it does those who invest in stock will rule the nest. Growth equals a bull market. When economic growth slows we enter a Bear market. Bear markets hurt most stocks — including our growth investments. But thanks to their rosy prospects for faster-than-normal growth these stocks tend to bounce back rather quickly than other stocks. Make no mistake about it, they’re called growth stocks because they deliver growth –in sales, revenues, market share, new product development and more.

The ideal investor, therefore, must be able to bargain hunt on Wall street to find the hidden treasures that lie hidden in growth companies. In other words –find growth stocks that others have overlooked. This investor approach is called value investing. The value investor wants his capital to keep growing over the years. If you choose your stocks wisely –they do well, delivering inflation-beating capital appreciation and that’s true value investing.

What are Growth Stocks?

A growth stock is a share in a company whose earnings are expected to grow at an above-average rate relative to the current market rate. A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. Growth investors choose stocks based on the potential for capital gains, not dividend income, so they can be risky.

Following the principles of value investing made billionaire investor Warren Buffett. Buffett’s value strategy took the stock of Berkshire Hathaway, his holding company, from $12 a share in 1967 to $70,900 in 2002. The company beat the S&P 500’s performance by about 13.02% on average annually! Although Buffett does not strictly categorize himself as a value investor, many of his most successful investments were made on the basis of the value investing principles found below.

Value Investing Strategies for Growth Stocks

We have a solid understanding of what value investing is and what it is not; let’s get into some of the qualities of investing in growth (value) stocks.

1. The value investor mentality sees a stock as the vehicle by which a person becomes an owner of a company – in value investing profits are made by investing in quality companies, not by trading.

2. Growth stocks can be located in any industry, including energy, finance, and even technology. As long as the industry is thriving and they need a climate of growth in which to thrive.

3. Learn as much as you can about a company before you buy stock in it. Start by calling the company’s investor relations people. Ask them to send you several years’ annual reports and the latest reports that stock analysts at three or four different brokerage firms have done on the company. Then see what else you can learn about the company on the internet. Seek out a detailed financial report on the company in Value Line at your local library. It will tell you how consistent past earnings have been, give you future growth projections and more.

4. Look for fundamentally sound growth companies that are temporarily out of favor with investors. It could be because a top executive has unexpectedly departed, or because the entire industry is depressed. The important thing is that the problem is short-term–giving you the opportunity to buy the stock at a bargain price.

5. Buy stock in companies who manufacture products you’re familiar with. If you’ve been using the same brand of shaving cream, look on the package to see who makes it. Chances are good it’s a large public company and a big, beautiful growth stock. If you find a product you like to find out if it’s owned by public companies, too.

6. Go with the people who know their stuff. How many pension and other institutional investors own stock in a company. If lots do it’ll tell you the most careful investment professionals believe in the stock too. Check out a list of stocks held by growth funds– that give you great insight to what growth stocks the institutions favor.

7. When investing for growth you stock that will continue to pay off for at least three to five years. So, don’t waste time on silly fads that are quickly replaced by the next thing.

8. Stay away from volatile stocks. Their prices may quickly rise, but fall even faster–and further–than they went up in the first place.

9. You don’t need to own stock in every company to earn money on your investments. As a matter-of-fact, most financial experts agree 12 stocks are enough for even long-time investors to diversify and own. You don’t want to own so many stocks that keeping up with all those companies and their industries becomes overwhelming. You’ll want to keep on top of how well your stocks are performing and to spot developments if need be. Keep it simple and invest in about 12 good performing companies.

10. Owning high-tech stocks is essential in this technology driven age. Now, value investors sometimes disagree with the principle that high beta (also known as volatility, or standard deviation stocks. See defined in terminology) necessarily translates into a risky investment. One way to tell is a stock with a beta of 1 is about as risky as the overall market. A stock with a beta of less than 1 is considered less risky. Find out the beta of any company you are considering investing in.

11. Value investors are very careful when it comes to investing in fast-growing companies. The faster it’s growing the riskier it’s considered. As a rule, the fastest growing companies are small. Remember we invest in big companies for long-term steady growth. With small companies, you have to ask –What’s driving the company’s stock today? It might be the company has just introduced a new product, or simply because its industry is growing. Be wary of stocks that grow 25% or even 30% per year. History has shown us these companies quickly run out of steam and you may be taken for a loop.

12. One of the great principles behind every investor’s success is knowing when it’s time to sell. I have been advising my clients for years, the time to say goodbye is when a stock no longer meets the criteria you used to buy it in the first place. And here are warning signs to look out for:

  • The industry is doing well but your company is not.
  • The company is steadily losing market share for its major product.
  • The rate of growth in company profits has slowed below 5% a year, for more than a year.
  • A new product is out that renders your company’s product obsolete.
  • New management is taking your company in a direction that not looking profitable.
  • Competition is consistently doing something better than your company.
  • Your company seems to be stuck in the past while the world is changing
Don Briscoe
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Don Briscoe

Finance educator, advisor, and leading voice in the global financial literacy movement.Founder and editor of MoneyPacers.com.He lives and enjoys life with his family in New York.
Don Briscoe
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