Growth investing is a stock-buying strategy that seeks to profit from companies growing at above-average rates compared to their industry. With a primary focus on increasing an investor's capital, this style is highly attractive as it can provide impressive returns as long as the emerging companies are successful. Since investors aim to maximize their capital gains, growth investing is also known as a capital growth strategy or a capital appreciation strategy.
Companies should show a proven record of strong earnings growth over the previous 5 to 10 years. If the company has displayed good growth in the recent past, it is most likely to continue doing so in the future.
An earnings announcement is an official public statement of a company’s profitability for a specific period. Growth investors pay close attention to these estimates so as to determine which companies are likely to grow at above-average rates compared to the industry.
If a company exceeds its previous five-year average of pretax profit margins as well as those of its industry, it may be a good growth candidate.
Compare a company’s present ROE to the five-year average ROE of the company and the industry. Stable or increasing ROE indicates that management is doing a good job generating returns from shareholders’ investments and operating the business efficiently.
If a stock cannot realistically double in five years, it is probably not a growth stock.