The Magic of Growth Stocks

by David Jenyns on September 28, 2007

The most magic word in Wall Street in recent years has been “growth.” If you bought “growth” stocks, you were in theory moving along the royal road to riches. Although some growth stocks performed dazzlingly, there can be great peril in paying too much for them, especially if the corporate progress so hopefully predicted may never materialize.

What are growth stocks anyway? Why should people buy them? What are their advantages and disadvantages?

A growth company is essentially one that is increasing (or should increase) its sales and earning power at a much faster rate than business in general or than the growth in population. Growth companies are usually located in dynamic and often new industries.

Every decade has produced its special fashions in financial stock market darlings that advanced on the basis of great enthusiasm for an industry or a particular company.

In the forties, after the war, there was a big upsurge in oil stocks, television shares, and pharmaceutical companies. In the fifties, drug stocks continued in fashion; there was a flurry in uranium; and toward the end of the decade a splurge in camera, electronic, missile, automation, and leisure time shares.

For the sixties the dynamic industries no doubt include chemicals, natural gas, electronics, scientific companies, finance and insurance companies, plastics, high temperature and corrosion-resistant metals, pharmaceuticals, and a whole series of companies catering to leisure time bowling, sports, boating, travel, photography, publishing, etc.

The things that mark and set apart individual growth companies might be quickly listed as follows:

1. Management that is intelligent, energetic, eager, and dedicated.
2. Capacity and facilities for innovation and research.
3. Product excellence in quality, advanced design, superior and more efficient performance.
4. A flair for salesmanship.
5. Unusual return on capital.
6. Annual increases in net profits of 15% or more.
7. Plowback of earnings.
8. Finally, a growth company is a stock-minded one.

Of course what you’re really looking for is a stock that can advance at an unusually rapid rate; and the only thing that will assure that is expanding earning power. The fine growth stocks are all moneymakers!

Historically, growth stocks have recorded remarkable gains in market price. In the ten-year period ended December 31, 1959, the stocks of all of the following companies have advanced by more than 500%:?American Home Products, ?Ampex Corporation Connecticut, ?General Life Electronics Associates Franklin, Motorola, and Texas Instruments.

This is just a random list of outstanding performers. Review those indispensable attributes of growth stocks listed and apply them to companies that interest you in dynamic industries.

Before you buy, get all the information you can yourself and from your broker. Then, consider the price of the stock you’re looking at in relation to present and prospective per share earnings, and virtually ignore dividend yield.

If you’re looking for a 5% yield on a good growth stock, you’ll just never buy one! Remember, growth stocks plow back instead of pay out most of their net. In buying stocks of this sort, what you’re purchasing is future earnings not present dividends.

Growth stocks can be very rewarding if the buyer knows what to look for when purchasing growth stocks. Remember to look for unusual increase in capital, good salesmanship, and increasing net profits. Be realistic, though, realizing not all companies statistics are synonymous with those like Motorola or Texas Instruments. Consider your personal statistics and the company’s statistics before purchasing your growth stock.

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