What is Growth Investing

Growth investing is the strategy of investing in stocks having current or expected earnings growth rates higher than that of their sector or the market as a whole. Investors here look for companies having high quality management, strong financial performance, and bright future outlook for capital appreciation. The growth companies may look overvalued compared to peers in terms of high price to earnings ratio, high price to book value ratio etc. because of appreciation of price at relatively higher rate. For example, Titan Company Ltd. has been a growth stock most of the time as its earnings growth has been generally higher than its peers, and its valuation ratios have also been higher than the sector.

The concept of growth investing was introduced by Thomas Rowe Price, Jr. He believed that superior returns could be earned by investing in well-managed companies in fertile fields whose earnings and dividends could be expected to grow faster than inflation and the overall economy. His investment management philosophy was based on investment discipline, process consistency, and fundamental analysis. As per John Train, the author of “The Money Matters”, Price looked for following characteristics in growth companies:

  • Superior research to develop products and markets.
  • A lack of cut-throat competition.
  • A comparative immunity from government regulation.
  • Low total labour costs, but well-paid employees.
  • At least 10% return on invested capital, sustained high profit margins, and a superior growth of earning per share.

Obviously, growth investors look at both quantitative and qualitative aspects of a company, with the expectation of the former yielding into enhancement of the latter. Traditionally, the companies having the potential to double the price of their stocks in 5 years are considered growth companies. This translates into compounded annual growth rate of around 15%. Growth stocks are generally high beta stocks with high volatility. So, in an upward trending market, they outperform the market. But, in the market recession, they perform worse than market.

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