Growth Stocks

Although there is no set definition used for growth stocks, it generally refers to a company whose share price is expected to grow at a higher rate than the market.

It usually does not pay a dividend, as most of these companies prefer to use earnings to reinvest into capital projects.

Some of the criteria involved in determining whether a company's shares can be classified as growth are:

1.) ROE-Return On Equity: Analysts expect to see a 15% return on equity. ROE is determined by taking a companys net income and dividing it by a companys net equity.

2.) Strong growth rates past and present. Small companies will be expected to grow at a faster rate than large companies. For example, a small cap company should have an annual growth rate in excess of 10% for the past 5 years. Whereas, a large cap company will have an annual growth rate around 7%. The projected growth rates should also meet this same criteria. It is very important that a company sustain its growth rate well into the future. A declining rate can quickly lower the price of any companys stock.

3.) EPS-Earnings Per Share: The stocks EPS should exceed the past 5 year market average and be forecasted to exceed the future 5 year market average.

4.) Can the stock double its value in 5 to 7 years? Although this may seem like a lot to expect from a large company, many analysts agree, it should have the potential to double based upon solid growth.

5.) Does the company reinvest profits into the development of new technology and products? Future growth is dependent upon how well a company can adapt to the ever changing business world.

As you can see, some of the criteria is very subjective. A good example would be a company who does not have the 5 year ROE in the past, yet its future ROE expectations could qualify it. The interpretation of the facts and expectations will always be the deciding factor.

Looking for a conservative investment for the upcoming year?

I have isolated a large cap growth stock and a small cap growth stock, that should provide above average returns.

Large Cap Recommendations

Growth Stocks

Small Cap Recommendations

Growth Stocks

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