Growth stock

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.^[1] 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.^[2] 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.^[3] In academic finance, the Fama–French three-factor model relies on book-to-market ratios (B/M ratios) to identify growth vs. value stocks.^[4] Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.^[5]

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

External links

• How to Find the Ultimate Growth Stock

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