When it comes to investing in the stock market, there are several approaches that prospective retail investors can adopt. However, whatever strategy the investor chooses to adopt, the end goal always remains the same – grow your investments and increase profitability.
Growth investing strategy is an investment strategy that has always remained a top approach among the best investors in the world.
What is Growth Investing strategy?
To apply a growth investing strategy, you must first understand the concept.
According to experts, growth investing strategy is about purchasing stocks attached to businesses with attractive characteristics that their peers in the industry lack. These can include parameters such as market-beating sales or earnings, impressive growth rates, substantial promoter holdings, and so on.
Growth investing in stocks may also look at more qualitative factors such as strong customer loyalty, the value of the brand, or its competitive moat.
The ideal stock where you can apply a growth investing strategy approach will hold on to its promising position in emerging industry niches. It will also feature roadmaps for long-term expansion.
The stocks are usually priced at a premium because they have the potential to deliver multi-fold returns combined with the success of the businesses in the recent past. It only reflects investors’ confidence and trust in the future of these stocks.
Growth Investing strategy vs Value Investing Strategy
A lot of investors confuse between growth and value investing. Many use the terms interchangeably. But, there is a lot of difference between the two.
Growth investing strategy involves selecting a company that is yet to reach its full potential but displays some signs of possible growth. The assumption here is the companies with growth potential also have the most substantial potential for high earnings.
On the other hand, value investing involves businesses that possess an inherent value that the market is yet to see. As a result, they may not show any signs of growth in the future. The assumption in value investing is that the inherent value beats all other fundamental factors that make the company successful.
In value investing, the investor may have to stay invested in such companies for several years before seeing any gains. There is also a risk of losing money if the company’s plans do not come to fruition. Growth investors invest in the business when it is at a nascent stage but are already on a rapid-growth path.
Irrespective of the investment styles, growth and value investing strategies need to be backed by solid research to ensure success.
5 Things to Consider Before You Choose Growth Investing Strategy
Growth investors use specific guidelines or a framework to analyse the stocks they invest in. But the process can vary from investor to investor.
The criteria to build the framework can also depend on the company the investor is analysing. For example, dynamic characteristics such as the company’s current situation are variable factors. It means that the investor also needs to evaluate the company’s past performance and compare it with its present circumstances.
The application of the framework may also differ depending on the industry.
That said, here are the 5 things that all retail investors must consider before choosing a growth investing strategy.
1. Increase in Quarterly Sales (YoY): Investors must look at the company’s increase in quarterly sales and compare it with the quarter of the previous financial year. It will give you an idea of how the company has performed over 12 months through quarterly sales growth.
2. Consistent Sales Growth Ratio Annually: Investors will be able to choose growth stocks with the help of this parameter that has consistently reported increasing sales every year. It allows you to evaluate the financial performance and health of the business.
3. Quarterly EBITDA Growth YoY: If you want to know more about the business’s operating profitability, you must look at the company’s EBITDA, which gives you an insight into how much cash the company generates from its business.
4. Quarterly Net Profit Growth YoY: A look at the quarterly increase in net profit enables the investor to gauge if the business is generating profit post deduction of all applicable expenses from its sales. Investors should also check if the company can maintain this net profit per the current market scenario and has the potential to grow it in the future.
5. Consistently Increasing Quarterly and Annual EPS: The Company’s EPS comparison to its previous quarters or financial years is an important parameter because it analyses the net income per share and measures the amount of net income earned per share of outstanding stock.
A Final Note
The simplest way to understand that you have a possible stock that can deliver long-term returns with the help of growth investing strategy is by looking at its valuation for a specific period. Then, compare it with its price to earnings multiple with the industry peers and broader market to get an overall feel before going forward with the investment.
Add to that the belief and confidence of the investor to spot the right stocks with the most significant potential and apply a growth investing strategy for providing future profits. Then you indeed have a winner on your hands.
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