From the railroads of the late 1800s, the invention of the automobile, the first airplane, the television, household appliances such as the stove, toaster, washing mashing, the first computer, the invention of the internet, to the future of eCommerce… growth companies make revolutionary changes to the way we live our lives.
Their polar opposite are value stocks, which are generally companies at a later stage of their growth cycle and whose stocks are trading at a low price-to-earnings (P/E) ratio.
In order to stay ahead of competitors, growth companies reinvest profits to develop even newer technologies and patents to ensure long term growth. The best are those of companies with profit margins that are increasing over time.
The search for great growth companies begins with identifying trends that change the way people do everyday things. They may appear in any sector or industry and typically trade at a high price-to-earnings (P/E) ratio and may not have earnings at the present moment but are expected to grow at a rate significantly above the average growth for the market.
Alternatively, investors can purchase growth stocks through growth oriented exchange-traded funds (ETFs) and mutual funds. Growth stocks generally do not pay dividends, but instead can offer substantial capital gains as a result of strong growth in the underlying company.
Look for these key factors when evaluating growth stocks:
Historical and future earnings
Returns on equity (ROE)
Share price performance
While investing in growth stocks can be lucrative, their prices can be extremely volatile, rising when the investment community believes the company will outperform its peers and dipping if the company's performance falls short of investor expectations.
The investments you make should fall in line with your personal short term and long term financial goals, risk tolerance, and other factors. It often makes sense to focus your purchases in industries and companies you know.