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Sri Lanka Equity Forum » Stock Market Talk » Expert Chamber » Stock-Picking Strategies: Growth Investing

Stock-Picking Strategies: Growth Investing

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1Stock-Picking Strategies: Growth Investing Empty Stock-Picking Strategies: Growth Investing on Wed Jul 23, 2014 12:58 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
In the late 1990s, when technology companies were flourishing, growth investing techniques yielded unprecedented returns for investors. But before any investor jumps onto the growth investing bandwagon, s/he should realize that this strategy comes with substantial risks and is not for everyone.

Value versus Growth
The best way to define growth investing is to contrast it to value investing. Value investors are strictly concerned with the here and now; they look for stocks that, at this moment, are trading for less than their apparent worth. Growth investors, on the other hand, focus on the future potential of a company, with much less emphasis on its present price. Unlike value investors, growth investors buy companies that are trading higher than their current intrinsic worth - but this is done with the belief that the companies' intrinsic worth will grow and therefore exceed their current valuations.

As the name suggests, growth stocks are companies that grow substantially faster than others. Growth investors are therefore primarily concerned with young companies. The theory is that growth in earnings and/or revenues will directly translate into an increase in the stock price. Typically a growth investor looks for investments in rapidly expanding industries especially those related to new technology. Profits are realized through capital gains and not dividends as nearly all growth companies reinvest their earnings and do not pay a dividend.

No Automatic Formula
Growth investors are concerned with a company's future growth potential, but there is no absolute formula for evaluating this potential. Every method of picking growth stocks (or any other type of stock) requires some individual interpretation and judgment. Growth investors use certain methods - or sets of guidelines or criteria - as a framework for their analysis, but these methods must be applied with a company's particular situation in mind. More specifically, the investor must consider the company in relation to its past performance and its industry's performance. The application of any one guideline or criterion may therefore change from company to company and from industry to industry.

The NAIC
The National Association of Investors Corporation (NAIC) is one of the best known organizations using and teaching the growth investing strategy. It is, as it says on its website, "one big investment club" whose goal is to teach investors how to invest wisely. The NAIC has developed some basic "universal" guidelines for finding possible growth companies - here's a look at some of the questions the NAIC suggests you should ask when considering stocks.

1. Strong Historical Earnings Growth?
According to the NAIC, the first question a growth investor should ask is whether the company, based on annual revenue, has been growing in the past. Below are rough guidelines for the rate of EPS growth an investor should look for in companies of differing sizes, which would indicate their growth investing potential:



Although the NAIC suggests that companies display this type of EPS growth in at least the last five years, a 10-year period of this growth is even more attractive. The basic idea is that if a company has displayed good growth (as defined by the above chart) over the last five- or 10-year period, it is likely to continue doing so in the next five to 10 years.

2. Strong Forward Earnings Growth?
The second criterion set out by the NAIC is a projected five-year growth rate of at least 10-12%, although 15% or more is ideal. These projections are made by analysts, the company or other credible sources.

The big problem with forward estimates is that they are estimates. When a growth investor sees an ideal growth projection, he or she, before trusting this projection, must evaluate its credibility. This requires knowledge of the typical growth rates for different sizes of companies. For example, an established large cap will not be able to grow as quickly as a younger small-cap tech company. Also, when evaluating analyst consensus estimates, an investor should learn about the company's industry - specifically, what its prospects are and what stage of growth it is at. (See The Stages of Industry Growth.)


3. Is Management Controlling Costs and Revenues?
The third guideline set out by the NAIC focuses specifically on pre-tax profit margins. There are many examples of companies with astounding growth in sales but less than outstanding gains in earnings. High annual revenue growth is good, but if EPS has not increased proportionately, it's likely due to a decrease in profit margin.

By comparing a company's present profit margins to its past margins and its competition's profit margins, a growth investor is able to gauge fairly accurately whether or not management is controlling costs and revenues and maintaining margins. A good rule of thumb is that if company exceeds its previous five-year average of pre-tax profit margins as well as those of its industry, the company may be a good growth candidate.

4. Can Management Operate the Business Efficiently?
Efficiency can be quantified by using return on equity (ROE). Efficient use of assets should be reflected in a stable or increasing ROE. Again, analysis of this metric should be relative: a company's present ROE is best compared to the five-year average ROE of the company and the industry.

5. Can the Stock Price Double in Five Years?
If a stock cannot realistically double in five years, it's probably not a growth stock. That's the general consensus. This may seem like an overly high, unrealistic standard, but remember that with a growth rate of 10%, a stock's price would double in seven years. So the rate growth investors are seeking is 15% per annum, which yields a doubling in price in five years.

An Example
Now that we've outlined the NAIC's basic criteria for evaluating growth stocks, let's demonstrate how these criteria are used to analyze a company, using Microsoft's 2003 figures. For the sake of this demonstration, we'll discuss these numbers as though they were Microsoft's most current figures (that is, "today's figures").

Stock-Picking Strategies: Growth Investing _growt10

Both of these are strong figures. The annual EPS growth is well above the 5% standard the NAIC sets out for firms of Microsoft's size.

Stock-Picking Strategies: Growth Investing _growt11

The projected growth figures are strong, but not exceptional.

Stock-Picking Strategies: Growth Investing _growt12

There are two ways to look at this. The trend is down 5.08% (50.88% - 45.80%) from the five-year average, which is negative. But notice that the industry's average margin is only 26.7%. So even though Microsoft's margins have dropped, they're still a great deal higher than those of its industry.

Stock-Picking Strategies: Growth Investing _growt13

Again, it's a point of concern that the ROE figure is a little lower than the five-year average. However, like Microsoft's profit margin, the ROE is not drastically reduced - it's only down a few points and still well above the industry average.

Stock-Picking Strategies: Growth Investing _growt14

The average analyst projections for Microsoft suggest that in five years the stock will not merely double in value, but it'll be worth 254.7% its current value.




Is Microsoft a Growth Stock?
On paper, Microsoft meets many NAIC's criteria for a growth stock. But it also falls short of others. If, for instance, we were to dismiss Microsoft because of its decreased margins and not compare them to the industry's margins, we would be ignoring the industry conditions within which Microsoft functions. On the other hand, when comparing Microsoft to its industry, we must still decide how telling it is that Microsoft has higher-than-average margins. Is Microsoft a good growth stock even though its industry may be maturing and facing declining margins? Can a company of its size find enough new markets to keep expanding?

Clearly there are arguments on both sides and there is no "right" answer. What these criteria do, however, is open up doorways of analysis through which we can dig deeper into a company's condition. Because no single set of criteria is infallible, the growth investor may want to adjust a set of guidelines by adding (or omitting) criteria. So, although we've provided five basic questions, it's important to note that the purpose of the example is to provide a starting point from which you can build your own growth screens.

Conclusion
It's not too complicated: growth investors are concerned with growth. The guiding principle of growth investing is to look for companies that keep reinvesting into themselves to produce new products and technology. Even though the stocks might be expensive in the present, growth investors believe that expanding top and bottom lines will ensure an investment pays off in the long run.
http://www.investopedia.com/university/stockpicking/stockpicking4.asp

2Stock-Picking Strategies: Growth Investing Empty Stock-Picking Strategies: Growth Investing on Sat Jul 26, 2014 12:06 pm

BullvsBear

BullvsBear
Senior Equity Analytic
Senior Equity Analytic
In the late 1990s, when technology companies were flourishing, growth investing techniques yielded unprecedented returns for investors. But before any investor jumps onto the growth investing bandwagon, s/he should realize that this strategy comes with substantial risks and is not for everyone.

Value versus Growth

The best way to define growth investing is to contrast it to value investing. Value investors are strictly concerned with the here and now; they look for stocks that, at this moment, are trading for less than their apparent worth. Growth investors, on the other hand, focus on the future potential of a company, with much less emphasis on its present price. Unlike value investors, growth investors buy companies that are trading higher than their current intrinsic worth - but this is done with the belief that the companies' intrinsic worth will grow and therefore exceed their current valuations.

As the name suggests, growth stocks are companies that grow substantially faster than others. Growth investors are therefore primarily concerned with young companies. The theory is that growth in earnings and/or revenues will directly translate into an increase in the stock price. Typically a growth investor looks for investments in rapidly expanding industries especially those related to new technology. Profits are realized through capital gains and not dividends as nearly all growth companies reinvest their earnings and do not pay a dividend.

No Automatic Formula
Growth investors are concerned with a company's future growth potential, but there is no absolute formula for evaluating this potential. Every method of picking growth stocks (or any other type of stock) requires some individual interpretation and judgment. Growth investors use certain methods - or sets of guidelines or criteria - as a framework for their analysis, but these methods must be applied with a company's particular situation in mind. More specifically, the investor must consider the company in relation to its past performance and its industry's performance. The application of any one guideline or criterion may therefore change from company to company and from industry to industry.

The NAIC
The National Association of Investors Corporation (NAIC) is one of the best known organizations using and teaching the growth investing strategy. It is, as it says on its website, "one big investment club" whose goal is to teach investors how to invest wisely. The NAIC has developed some basic "universal" guidelines for finding possible growth companies - here's a look at some of the questions the NAIC suggests you should ask when considering stocks.

1. Strong Historical Earnings Growth?

According to the NAIC, the first question a growth investor should ask is whether the company, based on annual revenue, has been growing in the past. Below are rough

guidelines for the rate of EPS growth an investor should look for in companies of differing sizes, which would indicate their growth investing potential:

Stock-Picking Strategies: Growth Investing _growt13

Although the NAIC suggests that companies display this type of EPS growth in at least the last five years, a 10-year period of this growth is even more attractive. The basic idea is that if a company has displayed good growth (as defined by the above chart) over the last five- or 10-year period, it is likely to continue doing so in the next five to 10 years.
2. Strong Forward Earnings Growth?

The second criterion set out by the NAIC is a projected five-year growth rate of at least 10-12%, although 15% or more is ideal. These projections are made by analysts, the company or other credible sources.

The big problem with forward estimates is that they are estimates. When a growth investor sees an ideal growth projection, he or she, before trusting this projection, must evaluate its credibility. This requires knowledge of the typical growth rates for different sizes of companies. For example, an established large cap will not be able to grow as quickly as a younger small-cap tech company. Also, when evaluating analyst consensus estimates, an investor should learn about the company's industry - specifically, what its prospects are and what stage of growth it is at.

3. Is Management Controlling Costs and Revenues?

The third guideline set out by the NAIC focuses specifically on pre-tax profit margins. There are many examples of companies with astounding growth in sales but less than outstanding gains in earnings. High annual revenue growth is good, but if EPS has not increased proportionately, it's likely due to a decrease in profit margin.

By comparing a company's present profit margins to its past margins and its competition's profit margins, a growth investor is able to gauge fairly accurately whether or not management is controlling costs and revenues and maintaining margins. A good rule of thumb is that if company exceeds its previous five-year average of pre-tax profit margins as well as those of its industry, the company may be a good growth candidate.

4. Can Management Operate the Business Efficiently?


Efficiency can be quantified by using return on equity (ROE). Efficient use of assets should be reflected in a stable or increasing ROE. Again, analysis of this metric should be relative: a company's present ROE is best compared to the five-year average ROE of the company and the industry.

5. Can the Stock Price Double in Five Years?

If a stock cannot realistically double in five years, it's probably not a growth stock. That's the general consensus. This may seem like an overly high, unrealistic standard, but remember that with a growth rate of 10%, a stock's price would double in seven years. So the rate growth investors are seeking is 15% per annum, which yields a doubling in price in five years.

An Example
Now that we've outlined the NAIC's basic criteria for evaluating growth stocks, let's demonstrate how these criteria are used to analyze a company, using Microsoft's 2003 figures. For the sake of this demonstration, we'll discuss these numbers as though they were Microsoft's most current figures (that is, "today's figures").

1. Five-Year Earnings Figures
Stock-Picking Strategies: Growth Investing _growt14
• Five-year average annual sales growth is 15.94%.
• Five-year average annual EPS growth is 10.91%.

Both of these are strong figures. The annual EPS growth is well above the 5% standard the NAIC sets out for firms of Microsoft's size.

2. Strong Projected Earnings Growth

Stock-Picking Strategies: Growth Investing _growt15
• Five-year projected average annual earnings growth is 11.03%.
The projected growth figures are strong, but not exceptional.

3. Costs and Revenue Control

Stock-Picking Strategies: Growth Investing _growt16

• Pre-tax margin in most recent fiscal year is 45.80%.
• Five-year average fiscal pre-tax margin is 50.88%.
• Industry\'s five-year average pre-tax margin is 26.7%.

There are two ways to look at this. The trend is down 5.08% (50.88% - 45.80%) from the five-year average, which is negative. But notice that the industry's average margin is only 26.7%. So even though Microsoft's margins have dropped, they're still a great deal higher than those of its industry.

4. ROE

Stock-Picking Strategies: Growth Investing _growt17
• Most recent fiscal year-end is ROE 16.40%.
• Five-year average ROE is 19.80%.
• Industry average five-year ROE is 13.60%.
Again, it's a point of concern that the ROE figure is a little lower than the five-year average. However, like Microsoft's profit margin, the ROE is not drastically reduced - it's only down a few points and still well above the industry average.

5. Potential to Double in Five Years

Stock-Picking Strategies: Growth Investing _growt18
• Stock is projected to appreciate by 254.7%.
The average analyst projections for Microsoft suggest that in five years the stock will not merely double in value, but it'll be worth 254.7% its current value.

Is Microsoft a Growth Stock?
On paper, Microsoft meets many NAIC's criteria for a growth stock. But it also falls short of others. If, for instance, we were to dismiss Microsoft because of its decreased margins and not compare them to the industry's margins, we would be ignoring the industry conditions within which Microsoft functions. On the other hand, when comparing Microsoft to its industry, we must still decide how telling it is that Microsoft has higher-than-average margins. Is Microsoft a good growth stock even though its industry may be maturing and facing declining margins? Can a company of its size find enough new markets to keep expanding?

Clearly there are arguments on both sides and there is no "right" answer. What these criteria do, however, is open up doorways of analysis through which we can dig deeper into a company's condition. Because no single set of criteria is infallible, the growth investor may want to adjust a set of guidelines by adding (or omitting) criteria. So, although we've provided five basic questions, it's important to note that the purpose of the example is to provide a starting point from which you can build your own growth screens.

Conclusion

It's not too complicated: growth investors are concerned with growth. The guiding principle of growth investing is to look for companies that keep reinvesting into themselves to produce new products and technology. Even though the stocks might be expensive in the present, growth investors believe that expanding top and bottom lines will ensure an investment pays off in the long run.


http://www.investopedia.com/university/stockpicking/stockpicking4.asp

Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics
Thanks

SHARK aka TAH

SHARK aka TAH
Expert
Expert
This article summarises in points form the traits to pick a growth stocks.

1.EPS Growth
2.Future Growth (Forward Earnings)
3.Control of Costs By Management
4.Double within 5 years

If we look carefully we might be able to pick few.......

TJL is one that comes into mind, I am sure members can pick few more

SHARK aka TAH

SHARK aka TAH
Expert
Expert
You know what EPS is. It’s earnings per share. EPS-GR stands for Earnings per share growth rate. This estimated growth rate is an important figure for valuing a company. When you compare the EPS history with the stock price history, it helps you determine the most likely future direction of the stock price.
Take note: In calculating a company’s earnings growth rate, you need to decide whether growth should continue at that same rate. Studying the firm, its products, and its competitive environment will help guide your decision to adjust the growth rate up or down.
Why is EPS-GR important?

Let me clarify with an example.
Let’s compare two stocks – stock of AB Ltd with an EPS of 5 and stock CD ltd with an EPS of 7.
At once glance, you may think that stock CD Ltd is better since it has an EPS of 7
A year later, AB Ltd has EPS of 5.50 per share while CD Ltd has an EPS of 7.50 per share.
This means, AB Ltd has grown 10% whereas, CD ltd has grown only 7.14%
Naturally, the price of AB Ltd will increase higher than stock CD. The stock price has direct relationship with the EPS and hence you will be getting more profit from a stock that has higher EPS-Growth rate.
Stock with the highest EPSGR rises fastest in that year as compared to its competitors in the same industry. If a company maintains a 10% or more EPS growth rate, that company may be a good target. However, such growth rates in EPS are more reliable in the case of ‘matured companies’ which has experienced a complete economic cycle of expansion and contraction, through a bear market phase and a bull run. New and fast growing companies may not have such a financial history to rely upon and may exhibit greater volatility in earnings history. Earnings history of such new and fast growing companies is less reliable in projecting growth rates than large matured companies with a consistent earnings history of 10 years or more. So, the chances of accuracy in predicting EPS growth increases for companies with greater financial history.
Calculation.
To calculate the growth rate in earnings of a company, let’s take an example. Let’s assume that the earnings per share (EPS) of a company is as follows:
Year EPS
2011: 4.50
2010: 4.20
2009: 3.90
2008: 3.45
2007: 2.80
2006: 2.10
In the five years from 2006 to 2011 the earnings per share increased from 2.10 to 4.50 and the growth has been consistent. In such cases, the first step is to calculate the growth multiple.
Growth multiple = 4.50/2.10 = 2.14
Next we raise the growth multiple of 2.14 to the 1/5th power:
(2.14)1/5 = 1.164
1/5th power has been used because we are calculating for 5 years. If the time period was three years, we use the 1/3rd power.
Next we take the 1.164 figure and subtract 1:
1.164 – 1 = 0.164
As a final step, we multiply .164 by 100 to get the average annual growth rate.
0.164 x 100 = 16.40% is the average annual growth rate.
From the historical and qualitative analysis, you have to take a decision as to what would be the rate of growth for the company in future. It’s your call. You can assume it as 16.40% or you can play safe by assuming a lower growth rate of 12% or 10%. It’s your decision.

http://www.sharemarketschool.com/estimating-eps-growth-rate/

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Stock investing strategy – Growth investing
by J Victor on September 23rd, 2011


In a nut shell….
Growth investors, invest in companies that exhibit signs of above-average growth. They don’t mind if the share price is expensive in comparison to its actual value. ‘Signs of above-average Growth’ is what growth investors try to spot. These signs gets revealed when you study the fundamentals. This is the exact opposite of ‘value investing’ approach. In a nutshell, the difference between ‘value’ investing and ‘growth’ investing lies in the methodology adopted by the investors. While the value investor looks for undervalued shares, the growth investor looks for shares with higher growth potential.
What exactly is ‘growth’?
Benjamin Graham defined a growth share as a share in a company “that has done better than average in the past, and is expected to do so in the future.” Any company whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy, can be categorized under ‘growth’. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business. Software companies are examples of growth oriented companies.
What’s the concept all about?
Investors who follow this strategy look for companies that exhibit huge growth in terms of revenues and profits. Typically, this set of investors looks for those in sunrise sectors (those in the early stages of growth) hoping to find the next Microsoft. A growth investor may look into the past year’s data to recognize the past growth rates and based on his studies about the industry’s potential and company’s prospects; try to estimate the future growth of the company. Investors look to spot a company that grows at minimum 15% annually. If a stock cannot realistically double in five years, it’s probably not a growth stock. That’s the general consensus. This may seem like an overly high, unrealistic standard, but remember that with a growth rate of 10%, a stock’s price would double in seven years. So the rate growth investors are seeking is 15% per annum, which yields a doubling in price in five years.
What does a Growth Investor look for in a stock?
Low dividend yields, high price-to-earnings ratio or high sales-to-market capitalisation ratio or a mix of all. For identifying stocks with high potential, growth investors look at key variables such as rate of growth in per share earnings over the last five-10 years, expected growth in earnings over the next five years or so, operating and net profit margins and business efficiency. A growth investor would target a company that’s growing at 15%-40% year on.
On a macro level, factors such as the stage in business cycle in which the industry operates, its relative attractiveness, and the positioning of the company in the competition matrix form part of the investment analysis. They then look at the current price and determine if it reflects the growth potential of the company’s business.
Growth – the risky strategy.
As growth investing often involves taking exposure to companies that trade at high valuation levels, the downside risk is relatively high. Sometimes, owing to their unproven business models, these companies could be sensitive to changes in market movements and business cycles.
Is a sky rocketing share a growth share?
Not necessasarily. Share prices can move up due to various reasons including fraudulent practices. High price is never a criteria for spoting a growth share. What matters is the rate of growth in the past years and the future prospects of the industry in which the company is in.
What are the sources to find Growth shares?
The best method is to do your own research. Most growth stocks can be spotted in the small cap and mid cap indexes. It is the growth rate that finally makes them large caps. Try to spot new companies that come up with innovative ideas – for example in medical Pharma industry. Watch companies that have grown from small cap to mid caps. Watch companies that breach all time high levels. Investigate why the prices sky rocketed. You may also validate shares of Industries that are currently facing market overreaction to a piece of news affecting the industry in the short term and try to spot one.
Is this approach popular?
Yes. If warren buffet is popular for his value investing strategies, Peter lynch is one of the greatest growth investors. Both he strategies are being used by investors according to market conditions worldwide.
What are the Pros and cons of Growth investing?
Pros:The biggest advantage of this approach is Potential for incredible returns in a short period of time
Cons:On the negative side, these shares carry the potential for huge losses.
Market downturns hit growth stocks far harder than value stocks.
Failure to relate the stock price to the company value leads to purchasing overvalued stocks
Hot stock tips, rumors, hype, and market hysteria are not reliable sources of information to act upon
Which is better? Value or growth?
Both has its pros and cons as mentioned in our lessons. In value investing, the investor has to ensure correct stock valuation as well as the right time of entry – both being equally vital as he would not like to get too early into a stock.
In growth investing, it is essential for the investor to identify businesses that face little threat of erosion so that earnings growth of those companies is not impacted. Growth investors are generally in for short time frame compared to value investors. In general, value stocks tend to hold up better during stock market downturns.
An investor having a high-risk appetite is more likely to choose a growth strategy. While a defensive investor would choose to take the value investing route.

http://www.sharemarketschool.com/stock-investing-strategy-%E2%80%93-growth-investing/

Further Reading for the weekend

SHARK

Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics
SHARK wrote:You know what EPS is. It’s earnings per share. EPS-GR stands for Earnings per share growth rate. This estimated growth rate is an important figure for valuing a company. When you compare the EPS history with the stock price history, it helps you determine the most likely future direction of the stock price.
Take note: In calculating a company’s earnings growth rate, you need to decide whether growth should continue at that same rate. Studying the firm, its products, and its competitive environment will help guide your decision to adjust the growth rate up or down.
Why is EPS-GR important?

Let me clarify with an example.
Let’s compare two stocks – stock of AB Ltd with an EPS of 5 and stock CD ltd with an EPS of 7.
At once glance, you may think that stock CD Ltd is better since it has an EPS of 7
A year later, AB Ltd has EPS of 5.50 per share while CD Ltd has an EPS of 7.50 per share.
This means, AB Ltd has grown 10% whereas, CD ltd has grown only 7.14%
Naturally, the price of AB Ltd will increase higher than stock CD. The stock price has direct relationship with the EPS and hence you will be getting more profit from a stock that has higher EPS-Growth rate.
Stock with the highest EPSGR rises fastest in that year as compared to its competitors in the same industry. If a company maintains a 10% or more EPS growth rate, that company may be a good target. However, such growth rates in EPS are more reliable in the case of ‘matured companies’ which has experienced a complete economic cycle of expansion and contraction, through a bear market phase and a bull run. New and fast growing companies may not have such a financial history to rely upon and may exhibit greater volatility in earnings history. Earnings history of such new and fast growing companies is less reliable in projecting growth rates than large matured companies with a consistent earnings history of 10 years or more.  So, the chances of accuracy in predicting EPS growth increases for companies with greater financial history.
Calculation.
To calculate the growth rate in earnings of a company, let’s take an example. Let’s assume that the earnings per share (EPS) of a company is as follows:
Year    EPS
2011:  4.50
2010:  4.20
2009:  3.90
2008:  3.45
2007:  2.80
2006:  2.10
In the five years from 2006 to 2011 the earnings per share increased from 2.10 to 4.50 and the growth has been consistent. In such cases, the first step is to calculate the growth multiple.
Growth multiple =   4.50/2.10 = 2.14
Next we raise the growth multiple of 2.14 to the 1/5th power:
(2.14)1/5 = 1.164
1/5th power has been used because we are calculating for 5 years. If the time period was three years, we use the 1/3rd power.
Next we take the 1.164 figure and subtract 1:
1.164 – 1 = 0.164
As a final step, we multiply .164 by 100 to get the average annual growth rate.
0.164 x 100 = 16.40% is the average annual growth rate.
From the historical and qualitative analysis, you have to take a decision as to what would be the rate of growth for the company in future. It’s your call. You can assume it as 16.40% or you can play safe by assuming a lower growth rate of 12% or 10%. It’s your decision.

http://www.sharemarketschool.com/estimating-eps-growth-rate/


Thanks SHARK!

PER= Market Price/EPS
PEG Ratio= PER/Growth
Value Companies = PEG <1.3
I have found few in the current market! Thanks again for the article.

SHARK aka TAH

SHARK aka TAH
Expert
Expert
We need to remember the key elements when picking Growth Stocks ......
I am bringing this thread up from time to time so we remember ..... and for Reading purposes

SHARK

stevenapple


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
SHARK wrote:You know what EPS is. It’s earnings per share. EPS-GR stands for Earnings per share growth rate. This estimated growth rate is an important figure for valuing a company. When you compare the EPS history with the stock price history, it helps you determine the most likely future direction of the stock price.
Take note: In calculating a company’s earnings growth rate, you need to decide whether growth should continue at that same rate. Studying the firm, its products, and its competitive environment will help guide your decision to adjust the growth rate up or down.
Why is EPS-GR important?

Let me clarify with an example.
Let’s compare two stocks – stock of AB Ltd with an EPS of 5 and stock CD ltd with an EPS of 7.
At once glance, you may think that stock CD Ltd is better since it has an EPS of 7
A year later, AB Ltd has EPS of 5.50 per share while CD Ltd has an EPS of 7.50 per share.
This means, AB Ltd has grown 10% whereas, CD ltd has grown only 7.14%
Naturally, the price of AB Ltd will increase higher than stock CD. The stock price has direct relationship with the EPS and hence you will be getting more profit from a stock that has higher EPS-Growth rate.
Stock with the highest EPSGR rises fastest in that year as compared to its competitors in the same industry. If a company maintains a 10% or more EPS growth rate, that company may be a good target. However, such growth rates in EPS are more reliable in the case of ‘matured companies’ which has experienced a complete economic cycle of expansion and contraction, through a bear market phase and a bull run. New and fast growing companies may not have such a financial history to rely upon and may exhibit greater volatility in earnings history. Earnings history of such new and fast growing companies is less reliable in projecting growth rates than large matured companies with a consistent earnings history of 10 years or more.  So, the chances of accuracy in predicting EPS growth increases for companies with greater financial history.
Calculation.
To calculate the growth rate in earnings of a company, let’s take an example. Let’s assume that the earnings per share (EPS) of a company is as follows:
Year    EPS
2011:  4.50
2010:  4.20
2009:  3.90
2008:  3.45
2007:  2.80
2006:  2.10
In the five years from 2006 to 2011 the earnings per share increased from 2.10 to 4.50 and the growth has been consistent. In such cases, the first step is to calculate the growth multiple.
Growth multiple =   4.50/2.10 = 2.14
Next we raise the growth multiple of 2.14 to the 1/5th power:
(2.14)1/5 = 1.164
1/5th power has been used because we are calculating for 5 years. If the time period was three years, we use the 1/3rd power.
Next we take the 1.164 figure and subtract 1:
1.164 – 1 = 0.164
As a final step, we multiply .164 by 100 to get the average annual growth rate.
0.164 x 100 = 16.40% is the average annual growth rate.
From the historical and qualitative analysis, you have to take a decision as to what would be the rate of growth for the company in future. It’s your call. You can assume it as 16.40% or you can play safe by assuming a lower growth rate of 12% or 10%. It’s your decision.

http://www.sharemarketschool.com/estimating-eps-growth-rate/

Thanks Shark Valuble reading.

10Stock-Picking Strategies: Growth Investing Empty Re: Stock-Picking Strategies: Growth Investing on Mon Jul 28, 2014 3:44 pm

stevenapple


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
SHARK wrote:Stock investing strategy – Growth investing
by J Victor on September 23rd, 2011


In a nut shell….
Growth investors, invest in companies that exhibit signs of above-average growth. They don’t mind if the share price is expensive in comparison to its actual value. ‘Signs of above-average Growth’ is what growth investors try to spot. These signs gets revealed when you study the fundamentals. This is the exact opposite of ‘value investing’ approach. In a nutshell, the difference between ‘value’ investing and ‘growth’ investing lies in the methodology adopted by the investors. While the value investor looks for undervalued shares, the growth investor looks for shares with higher growth potential.
What exactly is ‘growth’?
Benjamin Graham defined a growth share as a share in a company “that has done better than average in the past, and is expected to do so in the future.” Any company whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy, can be categorized under ‘growth’. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business. Software companies are examples of growth oriented companies.
What’s the concept all about?
Investors who follow this strategy look for companies that exhibit huge growth in terms of revenues and profits. Typically, this set of investors looks for those in sunrise sectors (those in the early stages of growth) hoping to find the next Microsoft. A growth investor may look into the past year’s data to recognize the past growth rates and based on his studies about the industry’s potential and company’s prospects; try to estimate the future growth of the company. Investors look to spot a company that grows at minimum 15% annually. If a stock cannot realistically double in five years, it’s probably not a growth stock. That’s the general consensus. This may seem like an overly high, unrealistic standard, but remember that with a growth rate of 10%, a stock’s price would double in seven years. So the rate growth investors are seeking is 15% per annum, which yields a doubling in price in five years.
What does a Growth Investor look for in a stock?
Low dividend yields, high price-to-earnings ratio or high sales-to-market capitalisation ratio or a mix of all. For identifying stocks with high potential, growth investors look at key variables such as rate of growth in per share earnings over the last five-10 years, expected growth in earnings over the next five years or so, operating and net profit margins and business efficiency. A growth investor would target a company that’s growing at 15%-40% year on.
On a macro level, factors such as the stage in business cycle in which the industry operates, its relative attractiveness, and the positioning of the company in the competition matrix form part of the investment analysis. They then look at the current price and determine if it reflects the growth potential of the company’s business.
Growth – the risky strategy.
As growth investing often involves taking exposure to companies that trade at high valuation levels, the downside risk is relatively high. Sometimes, owing to their unproven business models, these companies could be sensitive to changes in market movements and business cycles.
Is a sky rocketing share a growth share?
Not necessasarily. Share prices can move up due to various reasons including fraudulent practices. High price is never a criteria for spoting a growth share. What matters is the rate of growth in the past years and the future prospects of the industry in which the company is in.
What are the sources to find Growth shares?
The best method is to do your own research. Most growth stocks can be spotted in the small cap and mid cap indexes. It is the growth rate that finally makes them large caps. Try to spot new companies that come up with   innovative ideas – for example in medical Pharma industry.  Watch companies that have grown from small cap to mid caps. Watch companies that breach all time high levels. Investigate why the prices sky rocketed.   You may also validate shares of Industries that are currently facing market overreaction to a piece of news affecting the industry in the short term and try to spot one.
Is this approach popular?
Yes. If warren buffet is popular for his value investing strategies, Peter lynch is one of the greatest growth investors. Both he strategies are being used by investors according to market conditions worldwide.
What are the Pros and cons of  Growth investing?
Pros:The biggest advantage of this approach is Potential for incredible returns in a short period of time
Cons:On the negative side, these shares carry the potential for huge losses.
Market downturns hit growth stocks far harder than value stocks.
Failure to relate the stock price to the company value leads to purchasing overvalued stocks
Hot stock tips, rumors, hype, and market hysteria are not reliable sources of information to act upon
Which is better? Value or growth?
Both has its pros and cons as mentioned in our lessons. In value investing, the investor has to ensure correct stock valuation as well as the right time of entry – both being equally vital as he would not like to get too early into a stock.
In growth investing, it is essential for the investor to identify businesses that face little threat of erosion so that earnings growth of those companies is not impacted. Growth investors are generally in for short time frame compared to value investors. In general, value stocks tend to hold up better during stock market downturns.
An investor having a high-risk appetite is more likely to choose a growth strategy. While a defensive investor would choose to take the value investing route.

http://www.sharemarketschool.com/stock-investing-strategy-%E2%80%93-growth-investing/

Further Reading for the weekend

SHARK

Thanks shark. Very Clear.

11Stock-Picking Strategies: Growth Investing Empty Re: Stock-Picking Strategies: Growth Investing on Wed Aug 27, 2014 12:57 pm

MARKETWATCH2


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
thank you all. good stuff.

12Stock-Picking Strategies: Growth Investing Empty Re: Stock-Picking Strategies: Growth Investing on Sat Dec 20, 2014 2:31 pm

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Please read during the week-end

13Stock-Picking Strategies: Growth Investing Empty Re: Stock-Picking Strategies: Growth Investing on Sun Dec 21, 2014 3:47 am

hlsindrajith


Manager - Equity Analytics
Manager - Equity Analytics
Thanks shark for insights

14Stock-Picking Strategies: Growth Investing Empty Re: Stock-Picking Strategies: Growth Investing on Tue Apr 14, 2015 9:37 am

mr.castro


Stock Analytic
Stock Analytic
thanks... very important stuff.

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