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In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the companies typically reinvest most retained earnings in capital-intensive projects.

Criteria

Analysts compute return on equity (ROE) by dividing a company's net income into average common equity. To be classified as a growth stock, analysts generally expect companies to achieve a 15 percent or higher return on equity. CAN SLIM is a method which identifies growth stocks and was created by William O'Neil a stock broker and publisher of Investor's Business Daily. In academic finance, the Fama–French three-factor model relies on book-to-market ratios (B/M ratios) to identify growth vs. value stocks. Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.

See also

• Alternate stock categorizations:
  • Turnaround stock
  • Value stock
• Treatment of growth:
  • Sustainable growth rate § From a financial perspective
  • Stock valuation § Growth rate
  • Earnings growth
  • PEG ratio
  • PVGO
  • Valuation using discounted cash flows § Determine the continuing value
  • Benjamin Graham formula

References

1. "Top Growth Stocks". InvestingDaily.com. Retrieved 2010-06-03.
2. "Sivy on Stocks". CNNMoney.com. 2004-08-06. Retrieved 2004-08-18.
3. O'Neil, William J. (2002). How to Make Money in Stocks: A Winning System in Good Times or Bad. The McGraw-Hill Companies. ISBN 978-0-07-137361-6.
4. Fama, Eugene F.; French, Kenneth R. (1998). "Value versus Growth: The International Evidence". The Journal of Finance. 53 (6). American Finance Association, Wiley: 1975–1999. doi:10.1111/0022-1082.00080. ISSN 0022-1082. JSTOR 117458. Retrieved 2021-12-28.
5. "Multi-Style Investing: A Tale Of Two Investment "Styles"". Bernstein Global Wealth Management. 2004-07-22. Archived from the original on 2012-09-07. Retrieved 2009-08-20.

External links

• How to Find the Ultimate Growth Stock

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