Besides Fundamental analysis and qualitative analysis of a company or stocks many investors make use of growth investment as the investment strategy for a long term horizon. Growth investing is the most popular time-tested strategy to find best stocks. Growth investors put emphasize on the future potential of a company along with fundamental and qualitative factors with lower importance on its current price.In this column we will give you a step by step guide to how to pick Best stocks by Growth Investing method which may yield better returns in the long term.
How to pick Best stocks by Growth Investing Method
As mentioned earlier that growth investing emphasizes on the future potential of a stock than the stock’s current price. Let’s make it clear with an example. Very recently Govt. of India has launched Bharat Mala Project to make or develop better infrastructure throughout the country. So, in near future as well as far future, the direct beneficiaries for this project will be cement companies, steel companies, tar companies, infra companies etc. The companies in these sectors will get benefited and this will improve their earnings in the upcoming quarterly and yearly results.
Actually, growth investing is based on the future prediction on the basis of current scenario. Socioeconomic condition of the country keeps changing time to time. What is relevant or useful today may be invalid or obsolete in future as the technology is in pace. Let’s have an example. Electric vehicle is a new technology that is in pace in the country now. So, the companies operating in auto and auto ancillary sectors will have to cope with the technology. If the companies fail to cope up with the new technology, they will not be able to deliver the robust performance in terms of earnings in future. This is an instance only.
In fact all sectors are changing day by day due to the advent of new and new technologies. So,the companies will have to upgrade themselves to remain in the competition accordingly. Growth investing is none other than analyzing future aspects or possibilities of a company. Growth investing strategy includes following factors to consider while you invest in any company.
Profit from capital gains
Growth investors invest in those companies whose earnings growth is expected to increase above the industry growth. You may prefer a young company that has excellent growth potentials. You should keep an eye on new technologies and services are being launched or yet to come to the market. There is a great possibility that these technologies or services will gain popularity in future. So, obviously, companies operating in these sectors will get a boom. You can plan for long term horizon and choose or invest in such companies which re-invest profit into business instead of paying a lion share of the profit as dividends to its shareholders.
Strong historical earning growth
A good track record in respect of compounded sales growth, compounded profit growth, dividend yield reveals a company’s financial health. Before investing in any company you should check out the track record of the company for at least 5 years in respect of balance sheet, profit and loss account etc. If the company has delivered at least 15% earnings growth over the past 5 years, the company is worth investing. It can be hoped that the company will continue the robust performance in future.
Strong forward earning growth
Many brokerage houses and analysts in the market forecast the return when different companies announce their quarterly or annual results. Do not get misguided by these claims. You should rather analyse whether the stocks you have selected have delivered better numbers than the industry average.
Strong Profit margin
Sometimes companies cannot deliver desired profit growth after paying income tax though they make satisfactory sales growth. You need to analyse why the profit margin has not increased. There may be several reasons for this. The company may have paid off all its debts and made the balance sheet clear. This is a good indication that the company can deliver better numbers in near future. It may be the failure of the management which has been unable to cap the expenses of the company properly. You need to keep a close eye on these reasons. Generally, if the profit margin increases by 15% over the past 5 years and exceeds the industry average, the company may be a good bet for long term prospective.
Strong Return on equity
What the shareholders receive on their investment is called return on equity. You should analyse the returns generated by any individual company and the sector where the company operates. The role of the management is vital to deliver stable or increasing return on investment. If the return on equity is above 20% over the past 5 years it can be concluded that the management has delivered robust performance.
Strong stock performance
It is assumed if a stock cannot realistically double itself in 4 years the stock is not considered a growth stock. If a stock has delivered 100% return in 4 years it means the stock has delivered a return of 23% CAGR. The stocks with this stellar performance considered a good bet for future.
The last but not the least is that many investors think that there are some infallible strategies if once followed can guarantee success. But in reality there is no full proof system or way to pick best stocks. Every strategy is nothing but an application of theory. Your risk appetite, time horizon are the only concerns for investment strategy in any stock.
If you have any queries regarding Growth Investing method, make a comment so that we have a discussion. If you have found this post helpful, please share with your loved ones.