Growth investing

DEFINITION of Growth investing

Growth investing refers to the investment strategy that seeks stocks or shares with higher earnings growth prospect, irrespective of their prices.

WHAT IT IS IN ESSENCE

Such stocks tend to have low dividend yields, less downside protection, higher volatility. Also higher sensitivity to changes in interest rates than low growth shares. 

Firms with shares that trade at high valuation levels usually have high price-to-book (PB), price-to-earnings (PE), and price-to-sales (PS) ratios.

This is a style of investment strategy focused on capital appreciation.

Growth investors invest in companies that exhibit signs of above median growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term “growth investing” contrasts with the strategy known as value investing.

Growth investing is focusing on a company that has demonstrated a track record of high or emerging growth. If a company has a stock price that has gone up year-on-year over 3 years then that stock would be a target for growth investors. Even on a shorter timeline, if a stock has gone up in price every week for 3 weeks in a row then it would also be a target for growth investors.

Growth investing does not always take into account direct research or financial fundamentals. It may be a reaction to market sentiment.

HOW TO USE

Most investors do not depend on growth investing alone. They look at other indicators that would support a pattern for future growth.

Take the BMW as an example again.

If they are bringing out new lines of the car, expanding to different countries then it is clear that BMW is targeting growth as a strategy for the company. Then you know you may have a good stock if you are using a growth investing strategy.

While making a growth investment, it is very important to keep the investment for a longer term. As short-term investments are not really effective for this strategy.

The great influence in shaping this investment style had Phil Fisher, whose 1958 book “Common Stocks and Uncommon Profits” is still today a reference for identifying growth companies and we highly recommend this book.