How to Evaluate Stocks – Growth Investing


Evaluating stocks is actually quite easy. Once you’ve done it a few times you’ll develop a pattern of research that you can repeat with every new stock that interests you. But first, you need to understand the difference between growth and value investing, fundamental and technical analysis, know some basic stock mea­surements, and understand how to read the stock pages.

Growth Investing

Growth investors look for companies that are sales and earn­ings machines. Such companies have a lot of potential, and growth investors are willing to pay handsomely for them. A growth com­pany’s potential might stem from a new product, a breakthrough patent, overseas expansion, or excellent management.

stockmarket

Key company measurements that growth investors examine are earnings and recent stock price strength. A growth company without strong earnings is like an Indy 500 race car without an engine. Dividends aren’t very important to growth investors because many growth companies pay small or no dividends. Instead, they reinvest profits to expand and improve their busi­ness. Hopefully, the reinvestments produce even more growth in the future. Growing companies post bigger earnings each year and the amount of those earnings increases should be getting bigger, too. Most growth investors set minimum criteria for investing in a company. Perhaps it should be growing at least 20 percent a year and pushing new highs in stock price.

Most new growth stocks trade on the NASDAQ. Growth companies you’re probably familiar with are Microsoft, Intel, Starbucks, and Home Depot. Now you know what people mean when they drive past yet another Starbucks and say, “That place is growing like a weed.”

Growth investors are searching for hot hands, not great bar­gains. They’ll pay more for good companies. As a result, many growth investors don’t even look at a stock’s price in relation to its earnings or its book value because they know a lot of growth stocks are expensive and they don’t care. They just look at a stock’s potential and go for it, hoping that current successes con­tinue and get even better. They buy momentum, inertia, steam-rolling forward movement. That’s the nature of growth investing.

William O’Neil, a top growth investor, says in his seminar that growth investors are like baseball teams that pay huge salaries to top-ranked batters. They come at a high price, but if they keep batting .300 and win­ning games then it’s worth it. Likewise, you won’t find many bargains among growth stocks. But if they keep growing it’s worth it.

Because a growth stock depends on its earnings and the acceleration of those earnings, the expectations of analysts and investors are high. That creates a risky situation. If a growth com­pany fails to deliver the earnings that everybody expects, all hell breaks loose. Red flags fly left and right, phones start ringing off the hook, the stock price falls, reports shoot from fax machines across the world, and nobody’s dinner tastes quite as good as it did the night of last quarter’s earnings report.

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Related posts:

  1. How to Evaluate Stocks – Value Investing
  2. How You Make Money Owning Stocks
  3. How to Calculate Earnings per Share (EPS)
  4. How to Play the Stock Market
  5. How to Determine a Bargain Price in Stocks

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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