Investment strategy can generally be broken down into two approaches: investment in growth and investment in value.
Investing in value is the art of determining which stocks are undervalued and buying up in the expectation that their intrinsic value will in due course be realised.
Understanding Growth Investment
Growth investment is the art of determining which companies will have earnings growth at a higher rate than the industry or market average, resulting in a strong capital gain. Choosing which emerging companies will deliver those high capital returns is a higher risk strategy, but the gains can be impressive if you choose correctly.
Some commentators, like Warren Buffet, don’t think the differences in investment strategies are very marked. He sees a company’s potential growth as just one aspect of evaluating an investment opportunity.
Another investment guru, Peter Lynch, has merged the growth and value approaches into the “growth at a reasonable price (GARP)” strategy. Other names in the investment field have also put together their ideas on the best approach to growth investing over the decades: Philip Fisher’s 1958 book Common Stocks and Uncommon Profits is still consulted by investors.
Knowing Growth Investors
Growth investors generally look for relatively new up-and-coming companies brimming with potential, with the view that buying into them young will be rewarded as the companies mature. For this reason, a lot of growth investment focus is on new technologies and services. Don’t look for dividend earning from these companies, which tend to plough earnings back into the business as it grows and gains value. Your profits will come from the capital gain.
Predict tomorrow’s boom technology accurately today and you could do very well – but as usual there’s a snag. How do you read the signs to select the stocks with the best potential?
Investopedia advises that even with available guidelines for assessment, investors need to bring their individual judgement to evaluating companies in the context of each business’s history and the broader industry sector in general. Growth stocks should normally be able to double their stock price over 5 years, requiring a growth rate of 15%.
With that in mind, the criteria to apply to your assessment include looking for strong historical earnings growth, checking out earnings announcements for stocks with strong forward growth estimates, healthy profit margins, and a good return on equity.
David Saito-Chung of Investors.com suggests ways of finding the sweet spot for buying just before a stock is about to take off by identifying a pattern called “cup without handle”. That is, a U-shaped pattern, where the stock starts at a 52-week high, drops around 33% then begins a recovery that will take around 6 weeks – though this pattern can last for months. The investor needs to look for the point where the price is 10c higher than the earliest high of the pattern.
All this crockery-based investment analysis (another pattern is a cup with handle) can take practise, so it’s never a bad idea to speak with a professional investment adviser.
If you want advice on growth investment, contact United Global Capital today on 03 8657 7640 or email [email protected] for a no cost, no obligation consultation.