What is Growth Investing?
Growth investing targets companies with above-average revenue and earnings growth potential. These companies typically reinvest profits into expansion rather than paying dividends, aiming to increase their market share and competitive position. Growth stocks often trade at higher price-to-earnings ratios because investors are willing to pay a premium for expected future earnings growth.
Identifying Growth Stocks
Key metrics include the revenue growth rate, expanding profit margins, high return on equity, and a large addressable market. Technology, healthcare, and consumer discretionary sectors have historically produced many growth stocks. Companies like Amazon and Tesla are often cited as examples of growth investing, having traded at valuations that looked expensive against their earnings at the time.
Key Considerations
Growth stocks tend to be more volatile than value stocks and can suffer severe declines when growth expectations are not met. A company missing earnings estimates by even a small amount can trigger a sharp price drop. Growth investing requires conviction and patience, as well as the discipline to sell when the growth thesis is broken rather than when the stock price temporarily declines.