By Arjun Chandrasekar.
Overview
Growth investing in short is the strategy of using various metrics to invest in forecasted high-growth stocks. Most growth investors look for long-term holds in companies they believe in and see value in, popular industries include technology, sustainable energy, and medical. These are some of the rapid-growth industries which will stay long into the future.
Metrics (What to Look For?)
Using metrics to base your investment decisions is crucial to being a good investor. Here are a few of the most important data points to analyze: general history, price-to-earnings ratio, price-to-earnings-growth ratio, return on equity, and profit margins.
First, in order to detailly analyze the general history of a stock, you can use a stock analysis tool such as E*Trade Power to look over the graph trend over 6 months to a year. This will give you a general idea of how the stock has performed, helping lead you to decide if it’s a good investment or not. Then you can check the P/E ratio. To calculate this, just divide the share price by the earnings per price And all of this data can be found on sites like Yahoo Finance or Webull. The result of the calculation will tell you whether the stock is undervalued or overvalued. Generally speaking, lower P/E ratios are signs of a good investment. Next, you check the PEG ratio. Using the P/E ratio previously calculated, you take that value and divide it by annual earnings-per-share growth. PEG ratios over 1 usually indicate that the stock is overvalued, so most of the time you should look for stocks with a ratio under 1. After this, we can check the ROE. You can calculate ROE by taking the stock’s net income and dividing it by the shareholder’s equity. If the value you get, which will be a percentage, is high, that’s good. Usually, stocks’ ROE are at about 15-20% as a bar for analysis. Finally, we can check the company profit margins. You can find the profit margins by dividing income by total revenue, and this essentially gauges how much profit the company generates per sale. These are just 5 of the many data points you can look at to base your investment decisions off of. If the values you get from your calculations meet general expectations for growth stocks, it should be in the clear for a good investment.
Conclusion
To recap, growth investing is a long-term game. Investors use the metrics listed above to find stocks that they believe will steadily grow over years. It’s extremely important to do your due diligence as an investor before making decisions, and backing up your decisions with the right metrics will increase your chances of profiting.
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