Finding the right growth stocksto invest in is one of the mostimportant aspects of an investingsystem. If properly bought andsold, growth stocks provide muchmore in terms of appreciation than avalue investing system or a buy-and-holdstrategy.
No stocks are truly buy-and-holdstocks. This has been proven over thepast few years by stocks such asWorldCom and Enron, and by manytechnology stocks such as Sun Microsystems,Cisco Systems, and many otherformer leaders that declined 80% to90% or more from their peak prices.Every company eventually goes frombeing a growth stock that is appreciatingin price to either a stodgy high-cap stockthat does not appreciate in price anymoreor, like the former technologystocks, to one that declines substantiallyin price. The key is to buy and holdgrowth stocks during their periods ofgreatest price appreciation and avoidthem the remainder of the time.
The following are the fundamentalcharacteristics shown by the bestgrowth stocks:
•Current quarterly earnings.Earnings growth is the single mostimportant indicator of a stock's potentialto make a big price move. Thestocks you select should show a majorpercentage increase in current quarterlyearnings per share when comparedto the same quarter of the previousyear. The growth investor looks forlarge increases in current quarterlyearnings per share, and such increasesshould be at least 25%. Over the pastfew decades, the best performingstocks showed earnings increases of70% or more in the quarter rightbefore they started to make their hugeprice moves. Also, growth investorslook for accelerating earnings in atleast the three most recent quarters.
•Annual earnings growth. Thewinners also show good positive annualgrowth rates over the 5 years precedingthe price increase. The annual earningsper share should show consistentgrowth over the past 3 to 5 years, ideallyan average of at least 20% to 25%.
•New products, services, ormanagement. A growth stock thatmakes big gains often results fromnew products or services. But be waryof unproven products, especially if thecompany management doesn't have asolid track record. Superior managementis also essential to a company'ssuccess. That's why often a shake-upat the company's top managementpushes a stock's price higher. Returnon equity should be 20% or higher.And profit margins should be increasingor near their peak.
Michael Doran is a private money manager
affiliated with Sierra Capital Planning in
northern California. He runs a fee-based
business and a hedge fund for qualified investors.
For more information, call 877-467-8657 or visit www.sierrainvestor.com. Avanish Agrawal
contributed to this article.