In general, growth stock investing refers to investingin companies growing their earnings at above-averagerates. Such companies have entered a period ofvigorous and rapid expansion in earnings and sales. Asdiscussed in previous articles, the growth investor looksfor large increases in current quarterly earnings pershare, and such increases should be at least 25%. Thebest-performing stocks over the past few decadesshowed earnings increases of 70% or more in the quarterright before they started to make their huge pricemoves. Also, growth investors look for acceleratingearnings in at least the three most recent quarters.
There are two major advantages offered by investingin growth stocks. The first advantage is large stockprice appreciation. In general, growth stocks offer thelargest price increases. But physician-investors can'tblindly buy and hold such stocks, because after agrowth stock has made a huge increase in price (eg,100%, 300%, or even 1000% or more), it can also fallback in price just as much, or more.
This is what happened to the high-technologystocks of the 1990s. Stocks like Sun Microsystemsand Cisco Systems not only made huge moves, butalso came back down in price. Some such stockscame down more than 90% off their highs. Butgrowth stocks show well-defined topping patternsthat can be detected by the experienced investor.Such stocks can be sold prior to their making hugeprice moves down. This way, the growth investorwho buys and sells stocks correctly is able to takeadvantage of the large price move up, sell the stocks,and avoid the move down in price.
The second advantage is compounding your wealth,which is the fastest way to grow it. In general, the stockmarket is comprised of alternating bull and bear markets.The big winners of one bull market rarely lead thenext bull market cycle, which shows new growth stockwinners. For example, even though Sun Microsystems,EMC Corporation, and other high-tech stocks were bigwinners of the bull market of 1998 to 2000, they werenot the leaders of the bull market of 2003.
An astute physician-investor buys growth stockscorrectly, and then sells them after they show largestock price increases. Instead of holding onto themwhile they come down, the astute physician-investorhas cashed out and preserved their capitalfor compounding it in the new big winners of thenext bull cycle.
Whether you invest on your own or through astockbroker or money manager, make sure to keepin mind the importance of buying and sellinggrowth stocks correctly, and follow a well-plannedinvesting discipline like CANSLIM, instead of relyingon opinions, feelings, or emotions.
The CANSLIM™ Methodology
CANSLIM™is an acronym for a number of fundamentaland technical factors:
Current quarterly earnings per share
Annual earnings increases
New products, new management, and new highs
Supply and demand
Leader or laggard
Michael Doran is a private money manager affiliated with SierraCapital Planning in northern California. He runs a fee-based businessand a hedge fund for qualified investors. For more information,call 877-467-8657 or visit www.sierrainvestor.com. AvinashAgrawal contributes to stock research and wealth management atSierra Capital Planning Inc. Mr. Agrawal has master's degrees in electrical engineeringand in management science from Stanford University, with an emphasison pricing stocks and derivatives. He has been interviewed by Investor's BusinessDaily and has contributed articles to Working Money.