How to identify Growth Stocks?
The success of a business, and hence its growth, depends primarily on its customers. To find a great growth business, you need to evaluate it from a customer's point of view. Once you are satisfied that the company's sales and earnings will continue to grow and that you can buy the stock at a reasonable price, buy and hold it for a long time.
Here is an important lesson: How NOT to identify Growth Stocks?
Let's start with how NOT to identify a growth stock because it is especially important if you have been considering value investing.
You should not examine the financial fundamentals immediately after you have discovered a company that may grow in leaps and bounds for many years. Do not emphasize the fundamentals much.
- In other words, when you start thinking about a growth stock, do not start thinking about the historical P/E ratio or, for that matter, any other quantitative measure that you might have learned in business school.
- If you start thinking about traditional financial ratios, you will start thinking of value stocks, and you will probably never pick a great growth stock. You would never have picked shares in Microsoft, Wal-Mart, or Home Depot if you had looked at the fundamentals soon after the companies went public.
- Even if you knew these were incredible companies, you would have missed their tremendous potential.
We are not suggesting that traditional financial ratios are not important; we are simply suggesting that you should not try to identify a growth stock using financial ratios alone.