- Excellent Past Growth Rates: What is an excellent past growth rate is itself a matter for debate. It depends on factors like (i) rate at which economy is growing (ii) rate at which a particular Industry is growing (iii) maturity stage of the Industry & so on… A 10 percent growth rate (of a medium sized company) may be considered excellent in a well developed, mature economy, whereas it may be around 20 percent or more in a developing economy with a lower base effect and hence a faster growth rate. In India, a 20 percent growth rate is quite feasible for a mid-sized company, while a similar company may be growing at around 5% growth rate in developed countries. An intelligent and analytical investor can locate easily – through Fundamental analysis techniques, companies with HIGHER GROWTH RATES. Good fund managers are always on the look out for such stocks with high growth rates. There are companies with close to 45-50 percent CAGR (cumulative annual Growth rates) for the last, over 5 years, in Developing countries like India.
- EXCELLENT FUTURE GROWTH PROSPECTS : It may not always be possible that past growth rates will sustain in the future. Some sectors reach maturity stage or stagnation stage and further growth may come down to single digits. Hence, locating excellent future growth prospects is the next most important critical input. This depends on the maturity stage of the Industry, competition in the industry and so on. Each industry must be studied well for all such aspects. Locating growth stocks depends to a large extent, on locating first, good Growth Industries, within which the growth stocks exist.
- RETURN ON EQUITY : How much is the company earning on its equity? Is this growing quarter on quarter? At what rate is it growing? How does it compare with other firms in the Industry? A good growth stock must have positive return on equity which must be growing every quarter at a healthy rate. A high return on equity – but which is not growing Quarter on quarter – does not qualify for this purpose. I would not like to include companies with present negative returns in good growth stocks. They must make positive returns first. We must study the operational profits, gross profits and net profits, to understand where the strength of the company lies in earning its profits. A good growth stock must have strong operational profits, which are growing consistently. There are companies whose sales have come down drastically but whose Net profits have doubled in the same period. It would not be correct to put them in growth stocks list.
- STOCK PRICE : What is the current stock price of the company and how does it compare with Industry average? Unfortunately, Growth stocks usually are at the higher end of industry-wide stock prices. But, we must be able to project their future prices into next 5 years, based on current valuations, past growth rates, future growth prospects etc. Even growth stocks must preferably be bought at reasonable prices, at periodical corrections etc. However, it is usually advocated that once you have located a good growth stock, use the DOLLAR COST (OR, RUPEE COST) AVERAGING METHOD, to buy the stock periodically. A long term investor need not unduly be perturbed by current low or high prices. This position is true to some extent. Current high prices will look very low and cheap, after a quarter for Growth stocks. Yet, there is no harm in looking for price dips and corrections to accumulate growth stocks.
- NEW INDUSTRIES : What about new Industries and new companies under competent managements? Well. You may have none of the above criteria to satisfy. Yet, growth in such companies or industries could be FANTASTIC. A seasoned investor, who has studied different industries must be able to locate such valuable chances.
- The crux of this discussion is – you, as a good analytical investor – have a chance to invest in excellent growth companies and reap rich returns in such Growth stocks.
- DAILY STOCK QUOTES : When you are investing in GROWTH STOCKS, there is no need to bother much about daily stock prices. Yes. You must look at Quarterly results and annual results and analyze them. If you are adopting Dollar cost averaging technique for investing, invest periodically in the growth stocks, which are well-researched by you already – specially when their prices are under market-wide correction. Do not feel bad about such temporary dips in market prices. They are opportunities to BUY such growth stocks.
- TIME HORIZON: The typical time horizon - for investing in Growth stocks and reaping excellent returns is around five years. But legendary investors like Warren Buffet talk of ten years, and even, life time investing in growth stocks.