Growth Investing

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What Companies do Growth Investors Invest in?

In line with the name, growth investors primarily invest in growth stocks. Shares of growth companies are those that are still in the process of developing their potential. Industry niches with potential for expansion are generally identified, as are industries and companies in which new technologies and services are being developed. The profits of growth investors are usually realized through the capital appreciation of their stocks, not through dividend payments. In high-growth situations, growth companies often do not distribute dividends, but reinvest them in the business, since reinvesting dividends in the business is typically more profitable than distributing profits. FAANG companies, such as Meta (formerly Facebook), Apple, Amazon, Netflix, and Google, are examples of growth companies.

As mentioned previously, growth companies are typically young, innovative companies with the ability to expand. It should be noted, however, that growth can persist for a long time, even if the companies are no longer young or small. Technology companies and emerging markets are often associated with growth investing due to their stock prices being higher than their earnings or book values would indicate. Growth stocks have high price-to-earnings ratios (P/E). It is possible, however, for such valuations to be considered "cheap" if the company continues to grow rapidly, which would result in higher earnings and, therefore, a higher stock price. When expectations are not met, growth stocks can suffer dramatic declines because investors pay a high price for them based on expectations. Growth-oriented investments include recovery stocks, blue chips, and taking advantage of special situations.

The Key Characteristics of Growth Companies

Investing in growth companies involves extensive research to identify companies with the potential to grow rapidly and compete with large, existing companies. Consideration must be given to both objective and subjective factors. The assistance of a good wealth manager can be very beneficial when it comes to selecting such stocks. A number of factors can assist in the selection of companies that will provide growth for investment capital:

• Innovation, unique product lines, and access to special technologies (patents)
• No dividends
• Historical earnings growth over the last 5-10 years. Earnings per share (EPS) should be considered in relation to the size of the company.
• The company's earnings announcements should be evaluated in light of strong future earnings growth.
• Strong profit margins: In order to calculate profit margin, all expenses (except taxes) are subtracted from sales and then divided by sales. In general, a company is a good candidate for growth, if the company achieves pre-tax profit margins above its five-year average and the industry.
• High return on equity (ROE): ROE indicates how much profit a company makes on the money invested by shareholders as well as retained earnings. A stable or increasing ROE may indicate that management is doing a good job of making shareholder investments profitable and running the company efficiently.
• Strong stock performance: A growth stock should generally be able to double in 5 years, which equates to an annualized geometric return of just under 15% per year.

Growth-Investing und Value-Investing

The characteristics of growth stocks differ from those of value stocks. As a result of the strong growth of the underlying company, investors expect growth stocks to increase their investment capital significantly. Since these stocks tend to have high price-to-earnings ratios (P/E) as a consequence of this expectation, they may appear overvalued.

Conversely, value stocks tend to be undervalued or ignored by the market, but may ultimately increase in value over time. Additionally, investors seek to profit from the dividends these companies typically distribute. The price-to-earnings ratio (P/E) of value stocks is usually low.

In order to diversify their portfolios, some investors include both growth and value stocks. Others choose to specialize in either value or growth investing. As a general rule, the two types of investments do not necessarily contradict each other, since value stocks can have high growth even if they are cheaply valued, which means growth stocks do not always have to be highly valued.