What is stock growth

Growth Stocks - How to Find Growth Stocks for Your Portfolio

Annette de los Santos, June 8th, 2020

The growth strategy or growth strategy is one of the essential investment strategies on the stock market. In contrast to the value strategy, the growth strategy focuses more on the Growth prospects for entire industries than on the intrinsic value of individual shares. Growth investors try to identify future growth markets at an early stage and filter out those companies that have already secured significant shares in growing markets and benefit from their relative size. But young companies in promising industries can also be considered. Often it is possible to make profits on stocks whose companies are still posting losses.

A example For a successful investment according to the principles of the growth strategy in young companies is Facebook, which has not yet made any profits when it went public. EBay and Amazon have also been able to steadily increase sales and profits since going public.

The growth stocks also include companies that have been able to increase sales and profits for decades because they are constantly expanding or operating in constantly growing markets.

Growth stocks versus value stocks - who wins?

In fact, growth and value stocks are roughly equal over the long term. Value stocks have performed marginally better over the past several decades. However, the boundaries are fluid. Growth companies can become value companies, and value companies can grow faster by opening new, promising lines of business.

In times of the “New Economy”, the growth strategy was the more successful form of investment, at least until the bubble burst. Anyone who invested in the "right" companies back then, such as Apple or Google, can enjoy considerable returns.

The growth companies include especially (but not only) high-tech companies and increasingly also biotechnology or medical technology companies. With smaller companies and downright “newcomers”, however, there is a risk that growth expectations will not be met. Then the investor should sell these stocks as soon as possible. Continuous and intensive monitoring of these companies is therefore necessary.

Ultimately, it depends on the Investment horizon and risk tolerance of the individual investor, which strategy he prefers.

Find growth stocks

The most important key figure for stock picking, the P / E ratio (price-earnings-growth ratio) or PEG is used. In addition, stocks are also assessed using more complex methods, such as the discounted cash flow method. The price-to-sales ratio (KUV) can provide information about companies that are not yet making a profit but are generating rapidly growing sales. The price per share is set in relation to sales per share. A KUV = 1 means a fair market valuation, <1 indicates an undervaluation. During the Internet bubble, however, there was manipulation of sales, so that this key figure has faded somewhat into the background.

For companies that generate profits, the key figure "Earnings per share“(EPS - earnings per share) is essential. It is shown in every annual financial statement of a company listed on the stock exchange. This key figure is particularly meaningful when compared with other companies in the same industry, but should also be compared with the KUV, as some industries achieve lower margins than others.

The stock market expert Benjamin Graham always calculated the intrinsic value of a share and drew the first conclusions from it. The main features of this strategy are presented below.

Growth stocks: The calculation of the intrinsic value

The intrinsic value of a share indicates whether a share is over-, fair- or undervalued. For the Determination of the intrinsic value Graham made a simple formula for a share:

The formula shows that for the calculation of the intrinsic value only the two values Earnings per share and annual profit growth, are required. A calculation could then look like this:

identification numbervalue
Earnings per share2,00 €
Profit growth p.a.5 %

According to this calculation, the value of the share is € 37.00. If one looks at the formula in exactly the same way, one finds that Graham with his formula that Earnings per share multiplied by the P / E ratio (determined in brackets). The formula can also look like this:

For a meaningful calculation of the share value, at least the last 5 - 10 years must be considered. Calculating an average value can be useful here. The big problem here, however, is that you can either fall back on the figures of the last annual reports or the current estimates of relevant finance portals or financial magazines. If you compare the results of both data sources, some serious differences in value become apparent.

The conclusion to this must therefore be that Graham's formula for rough assessment can be used. However, you should also use other methods in order to create a meaningful basis for decision-making. This includes a look at the largest Competitor and the development or development potential of the industry. In addition, a look at the current reporting related to the industry and the company concerned can be useful. Investors should also always have a Margin of safety Take into account in order to be able to cushion the unforeseen.

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