Growth stock

In finance, a '''growth stock''' is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry.<ref>{{cite web | url = http://www.investingdaily.com/glp/32175/investing-in-growth-stocks-top-momentum-stocks-to-own-now.html | title= Top Growth Stocks | publisher = InvestingDaily.com | access-date = 2010-06-03}}</ref> A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the companies typically reinvest most retained earnings in capital-intensive projects.

==Criteria== Analysts compute return on equity (ROE) by dividing a company's net income into average common equity. To be classified as a growth stock, analysts generally expect companies to achieve a 15 percent or higher return on equity.<ref>{{cite news | url = https://money.cnn.com/2004/08/06/commentary/mkcommentary/sivyguide_six_guestions/index.htm | archive-url = https://web.archive.org/web/20121021164032/http://money.cnn.com/2004/08/06/commentary/mkcommentary/sivyguide_six_guestions/index.htm | url-status = dead | archive-date = October 21, 2012 | title= Sivy on Stocks | publisher = CNNMoney.com | access-date = 2004-08-18 | date=2004-08-06}}</ref> CAN SLIM is a method which identifies growth stocks and was created by William O'Neil a stock broker and publisher of ''Investor's Business Daily''.<ref>{{cite book | title = How to Make Money in Stocks: A Winning System in Good Times or Bad | url = https://archive.org/details/howtomakemoneyin00mcgr | url-access = registration | first = William J. | last = O'Neil | author-link = William O'Neil | publisher = The McGraw-Hill Companies | date = 2002 | isbn = 978-0-07-137361-6}}</ref> In academic finance, the Fama–French three-factor model relies on book-to-market ratios (B/M ratios) to identify growth vs. value stocks.<ref name="Fama French 1998 pp. 1975–1999">{{cite journal | last1=Fama | first1=Eugene F. | last2=French | first2=Kenneth R. | title=Value versus Growth: The International Evidence | journal=The Journal of Finance | publisher=American Finance Association, Wiley | volume=53 | issue=6 | year=1998 | issn=0022-1082 | jstor=117458 | pages=1975–1999 | doi=10.1111/0022-1082.00080 | url=http://www.jstor.org/stable/117458 | access-date=2021-12-28| url-access=subscription }}</ref> Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.<ref>{{cite web | url = http://www.bernstein.com/public/story.aspx?cid=744&nid=185 | title = Multi-Style Investing: A Tale Of Two Investment "Styles" | date = 2004-07-22 | publisher = Bernstein Global Wealth Management | access-date = 2009-08-20 | archive-url = https://archive.today/20120907132842/http://www.bernstein.com/public/story.aspx?cid=744&nid=185 | archive-date = 2012-09-07 | url-status = dead }}</ref>

The definition of a "growth stock" differs among some well-known investors. For example, Warren Buffett does not differentiate between value and growth investing. In his 1992 letter to shareholders, he stated that many analysts consider growth and value investing to be opposites which he characterized "fuzzy thinking."<ref>{{Cite web |title=Chairman's Letter - 1992 |url=https://www.berkshirehathaway.com/letters/1992.html |access-date= |website=}}</ref> Furthermore, Buffett cautions investors against overpaying for growth stocks, noting that growth projections are often overly optimistic. Instead, he prioritizes companies with a durable competitive advantage and a high return on capital, rather than focusing solely on revenue or earnings growth.<ref>{{Cite book |last=Buffett |first=Warren |title=The Essays of Warren Buffett: Lessons for Investors and Managers |date=1997}}</ref>

Peter Lynch classifies stocks into four categories: "Slow Growers," "Stalwarts," "Fast Growers," and "Turnarounds."<ref name=":0" /> He is known for focusing on what he calls "Fast Growers" referring to companies that grow at rates of 20% or higher. However, like Buffett, Lynch also believes in not overpaying for stocks emphasizing that investors should use their "edge" to find companies with high earnings potential that are not yet overvalued.<ref>{{Cite book |last=Lynch |first=Peter |title=Beating the Street |date=1993}}</ref> He recommends investing in companies with P/E ratios equal to or lower than their growth rates and suggests holding these investments for three to five years.<ref name=":0">{{Cite book |last=Lynch |first=Peter |title=One Up on Wall Street |date=1989}}</ref> He is often credited for popularizing the PEG ratio to analyze growth stocks.<ref>{{Cite web |title=Growth Investing with a Value Twist |url=https://www.nasdaq.com/articles/growth-investing-with-a-value-twist}}</ref>

== Valuation and risk == Growth stocks are often valued on the basis of expected future earnings and revenues rather than current income distributions. Fidelity defines growth stocks as companies whose earnings or revenues are expected to grow faster than the market average.<ref>{{cite web |title=What is a growth stock and should you buy them? |url=https://www.fidelity.com/learning-center/trading-investing/growth-stock |website=Fidelity |access-date=18 May 2026 }}</ref>

This reliance on future expectations can make growth stocks more sensitive to changes in valuation and market sentiment. Nasdaq notes that growth stocks often carry higher valuation multiples than the broad market and tend to be more volatile than the market average.<ref>{{cite web |title=Value vs Growth: Current Trends, Top Stocks & ETFs |url=https://www.nasdaq.com/articles/value-vs-growth%3A-current-trends-top-stocks-etfs |website=Nasdaq |access-date=18 May 2026 }}</ref>

==See also== *Alternate stock categorizations: ** Turnaround stock ** Value stock * Treatment of growth: **{{slink|Sustainable growth rate #From a financial perspective}} **{{slink|Stock valuation #Growth rate}} **Earnings growth **PEG ratio **PVGO **{{slink|Valuation using discounted cash flows #Determine the continuing value}} **Benjamin Graham formula

==References== {{reflist}}

==External links== * [http://www.fool.com/investing/general/2004/09/28/how-to-find-the-ultimate-growth-stock.aspx How to Find the Ultimate Growth Stock]

Category:Fundamental analysis Category:Stock market