The Growth Investing Strategy
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
When it comes to stock investing, there are two ways to take the bull by the horns, two well-known styles of equity management are growth investing and value investing. Both styles offer a long-term, disciplined approach to capital appreciation, however, two styles go about their business in fundamentally different ways.
As a growth stock-investor the game plan is simple: Earnings drive stock prices, so invest in those companies that are out earning the market. Your focus should be on the fastest growing sectors of the market and be investing only in the leading companies which have historically delivered consistent earnings growth. However, you must be selective in this group and only invest in companies that are still selling at a lower P/E or at a reasonable price to the market. The key is to reap the potential rewards of growth stock investing without paying too much is also known as “growth at the right price,” or GARP.
In searching for these stocks, investors should look for the indicators such as better than expected earnings forecast, healthy profits, rising sales and a solid balance sheet. You should look for opportunities where all the good news is not yet reflected in the market but growing 40% faster, buy it. Yes, it appears to be expensive (higher P/E) compare to the market but in this situation growth is clearly out pacing the price of the stock. And it can be a good investment.
Buying is only half the story for successful investing. The other half is to know when to get out of the position or when to sell it. Like an good investment style, the growth philosophy is rules by clear-cut buy and sell discipline. The time to sell reaches when the stock reaches its fair market value or a decline in earnings is anticipated. In other words, you should not sell merely because you have some profit. You should only consider selling when the fundamentals are likely to change which include sales and earning forecast.
Dividend or No Dividend
Much of the results of a growth portfolio will typically come in the form of capital appreciation. As a general rule, growth companies pay lower or no dividend. These companies rather use cash to reinvest for expansion. Don’t be surprised if you see that these companies are paying no dividends. For example, Intel and Microsoft are two of the best technological companies and are growing faster but they don’t pay any dividends. They use money for research and development and sometime to buyback their own stocks, which in turn increase the value of existing shareholders.
Some points to remember
I use the following criteria as a guide to pick growth stocks:
- 20% earnings growth
- 12% sales growth
- 12% return on equity
- Low debt as compare to total capitalization
- Superior products, technologies
- Strong management
You can collect all these clues or information just like the pro’s at your local library to make informed decisions. Most libraries have the Value-line Survey. It is an excellent source of information and should be used when researching companies for investment. In addition, the internet is a great source for valuable information without leaving your home. If you don’t have access to this service it is also available at your local library.
Investing haphazardly and chasing the “hot” tips often lead to a financial ruin. I can not emphasis enough the importance of developing a comprehensive plan for financial success. So arm yourself with knowledge and discipline and chances are you will be writing your success story. Do not buy on “hot” tip. Invest after much homework and research.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)