What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Growth stock

Growth investing is the practice of buying stocks that are expected to grow earnings (and stock price) at rates that exceed the market or industry average.

Contents

Expanded Definition

Growth investing is a strategy that looks for companies and stocks that are poised to grow faster than average, often due to exploiting a new technology or a new market niche. One of the most profitable periods for growth stocks was the late 1990s, when the advent of the Internet changed the playing field substantially.

In most views, it is the company earnings or net income which is expected to grow at faster rates. With a given P/E ratio, this implies that the stock price would appreciate substantially and rapidly. In many cases, growth stocks are awarded an even higher P/E ratio than average to "reward" the company for growing so quickly. In this situation, there is the danger, though, of rapid declines in the stock price if the company fails to meet earnings expectations, more so than a miss might seem to warrant. With high expectations come high hurdles and if the company fails to clear the hurdle, the stock price can be punished severely. For instance, when it became clear that Microsoft was no longer a growth company, its stock price languished for an extended period of time.

Of course, you don't need to buy the high-fliers or the "hot" stocks in order to be invested in strong growers. Many companies fly below the radar of Wall Street or the talking heads, but grow at a steady, reasonable clip and reward their shareholders handily over time.

Growth investing is frequently contrasted with value investing, the practice of buying securities for less than their intrinsic value. But these distinctions are largely academic -- growth investors don't buy stocks thinking they're overvalued, and value investors don't buy stocks thinking the companies they represent won't grow. Warren Buffett has a famous quote on this: "Growth and value investing are joined at the hip." Peter Lynch, another famous investor, merged the two sides together with his "growth at a reasonable price" or GARP strategy.

In Fooldom

At The Motley Fool, growth investing has been the long-term practice of David Gardner, who practices his own form of this approach in Motley Fool Stock Advisor (where he competes against his brother Tom) and Motley Fool Rule Breakers, a team-based approach to identifying disruptive technologies and the emerging companies bringing these to market.

Related Terms

Recent Mentions on Fool.com

Advertisement