Growth investing is investing in companies whose earnings are expected to grow at a higher rate over the longer term. A growth investor focuses on a company’s future potential. While there is a general public perception that growth stocks normally represent either companies in the high-tech industries or are small companies, this is not always the case. Coca Cola and Walmart for example can be regarded as growth stocks that are certainly not high tech. Investors who buy stocks based on the research they have conducted and their convictions that the price of the stocks will rise over the long term can be referred to as growth investors.

In order to decide whether to invest in growth stocks, it is best if you ask the following questions:

1. What is the company’s sales and earnings growth potential over the next several years?
2. What are employee-manager relations like?
3. Is research and development important to the company?
4. How does the company respond to challenges it encounters?
5. What is the quality of the company’s management?
6. How sustainable are the company’s profit margins?
7. What is the company’s weak spot?

1. What is the company’s sales and earnings growth potential over the next several years?

There is no point in undertaking a thorough investigation of a company if it does not have a long-term growth potential. For example, in the 1990s, most people should never have invested in Internet companies because they had no way of knowing how sustainable the long-term growth of those companies were. And indeed, most of them went bankrupt even though there was an abundance of euphoria when they were floated on various stock exchanges around the world.

2. What are employee-manager relations like?

If the relations between employees and their management are good, this results in the company having highly satisfied customers. Even if a company produces high quality goods and services, if the employees are not happy, this would ultimately result in poor customer satisfaction. The best way of determining if a company’s employees are happy is by actually asking them, if you have access to them.

3. Is research and development important to the company?

Research and development (R&D) is a core requirement of all companies if one of their goals is to continuously improve their products and services. If a company’s success in previous years has been due to the resources it applied to R&D, a simple but pertinent question you can ask is whether the company is pursuing R&D at similar levels. Investors who try to use past sales growth to predict future sales growth without taking into account the impact of R&D are more likely to endanger their investments.

It is difficult as an investor, to know the efficacy and effectiveness of a company’s R&D efforts when compared to others. Just because a company deploys more of its resources into R&D does not mean that its efforts will result in more marketable products and services.

The only way you can learn about the effectiveness of a company’s R&D efforts is by learning as much as you can about the company from various sources.

When you are in the process of making your investment choices, it is best not to perform a comparative study of the R&D budgets of various companies. Rather, it is better to evaluate the effects that the company’s R&D efforts produce. In addition, it is also best to evaluate whether the expenditure that the company spends on R&D is continually aligned with the company’s growth in revenues.

4. How does the company respond to challenges it encounters?

Finding out how a company responds to the challenges it encounters can be a particularly difficult task. This is because these aspects of companies cannot be determined by looking at their financial ratios. They are qualitative in nature and thus may require considerable research. Understanding this aspect of a company entails examining the number of times in the past the company has made major changes with regards to its business strategy. It is also important to look at the culture of the company and see if it encourages and allows change.

5. What is the quality of the company’s management?

There are a number of ways that you can use to determine the quality of a company’s management. These include the following:

If you can, ask the company’s consumers, suppliers, and employees what they think of its management.

Review the Fortune’s annual list of the world’s most admired companies and Barron’s list of the world’s best CEOs for further investigation.

Find out whether the senior executives own the company’s shares and whether they retain those shares as part of their compensation. If they sell the shares or exercise their share options often, then that company needs further investigation.

If a company appoints a new CEO with no experience in the business or industry sector in which the company operates, you must also investigate that company much more.

6. How sustainable are the company’s profit margins?

When a company has profit margins that are high and it maintains those margins at that high level, then any growth in sales it experiences will results in better and better results.
The first step in investigating a company’s profits is to look at its profit margin. Promising growth companies almost always have profit margins that are higher than other firms in the same industry.

7. What is the company’s weak spot?

With companies having so many potential variables to examine, from time to time, it is best to take another perspective and ask what the company’s achilles’ heel is. Taking this perspective will prevent you from getting too attached to a stock and give you the ability to sell the stock if the company’s situation suddenly deteriorates.

Table of Contents

1. Introduction
2. Fundamental Analysis
3. Qualitative Analysis
4. Value Investing
5. Growth Investing
6. GARP Investing
7. Income Investing
8. CANSLIM
9. Dogs of the Dow
10. Technical Analysis 1
11. Technical Analysis 2
12. Technical Analysis 3
13. Technical Analysis 4
14. Jim Cramer’s Strategies
15. Warren Buffet’s Strategies
16. Intrinsic Value