Growth investment
 

The main principle behind growth investment is to focus on companies with future growth prospects and have less focus on the current price assessment. As a growth investor, you can actually buy companies that at today's pricing have very high P/E ratios, where you believe that the values will rather grow over time.

Growth investors are looking for companies that are most likely to re-invest their profits to acquire other or competing companies. They do this to expand the business model, or to grow the company's performance in exchange for paying dividends to shareholders.

Good indications to assess the growth in companies ​

  • Strong historical revenue growth - for example, there should be a minimum of 20% + increase in the last two quarters.

  • Strong historical earnings growth  - for example, it can be a minimum of 8 % +  increase in the last two quarters.

  • Strongly predicted future earnings growth - for example, a minimum of 10% + increase over the next 1 to 2 years.

  • The margins on the revenues are high - does the company have sufficient control over costs relative to its revenues? ​

  • Return on equity (ROE)  an increasing ROE indicates that the company has an increased capacity to generate profits.

  • Share price development - How much has the share price grown in recent years? A growth of, for example, 15% annually may give an indication that the share has the potential to continue to grow if the growth in earnings also continues to increase relative to the share price growth. ​

Growth at a reasonable price (GARP)

There is also something that is widely used called GARP (Growth at a reasonable price), which is a combination of both value and growth investment. If you are an investor looking for companies that, in addition to experiencing strong growth, have good valuation grounds, you can look for indications such as:

  • That the company has a share price that is slightly lower than what you consider to be the "right" intrinsic value.

  • The company has the potential for sustainable growth with a focus on a realistic growth rate between 10-30%.

  • The company has delivered positive earnings over a few years (or the time perspective you want).

  • The company has predicted positive earnings​ for the years to come.

  • An investment in the company will result in a high and increasing growth in ROE.

  • Ideally, you are looking for companies with relatively low to medium P/E.

  • The company has a low P/B ratio or other similar criteria.

There is a lot you can use to assess companies that are experiencing growth. As you can see, as a pure growth investor, it is not so important which figures the company delivers today, but rather what you think the future figures will be based on the growth potential. Companies that over time have experienced great growth are often those that have experienced the greatest price gains in the share price. At least based on the last 20 years of historical data. Good examples are companies such as; Netflix, Amazon, Apple, Microsoft, Facebook, and more.

If you'd rather have a slightly more "secure" investment, try a hybrid GARP investment strategy. Where you look at both current figures and future growth potential. These are often companies that are a little more "mature" and have already shown that their business model works and delivers earnings, but that the potential is even greater.

As mentioned on the value investment page, you will also as a growth investor need to wear "the long glasses". You must have faith that your assessments are right and that the market will price the company higher over time. It is then the future growth that will lead the share price further in the years to come. You will see that companies that deliver on quarterly reports, show increasing growth, as well as guide further future growth, will get "kudos" from the market. These are stocks that will increase in price and give good returns in the market.

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