finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
, a growth stock is a
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...
of a company that generates substantial and sustainable positive
cash flow
A cash flow is a real or virtual movement of money:
*a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
and whose
revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...
s and
earnings Earnings are the net benefits of a corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT (earnings before intere ...
are expected to increase at a faster rate than the average company within the same industry. A growth company typically has some sort of
competitive advantage
In business, a competitive advantage is an attribute that allows an organization to outperform its competitors.
A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...
(a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller
dividend
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
s, as the companies typically reinvest most
retained earnings
The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that peri ...
in capital-intensive projects.
Criteria
Analysts compute
return on equity
The return on equity (ROE) is a measure of the profitability of a business in relation to the equity. Because shareholder's equity can be calculated by taking all assets and subtracting all liabilities, ROE can also be thought of as a return on ''a ...
(ROE) by dividing a company's net income into average
common equity Common equity is the amount that all common shareholders have invested in a company. Most importantly, this includes the value of the common shares themselves. However, it also includes retained earnings and additional paid-in capital.
Basel III ...
. To be classified as a growth stock, analysts generally expect companies to achieve a 15 percent or higher return on equity.
CAN SLIM CAN SLIM refers to the acronym developed by the American stock research and education company '' Investor's Business Daily'' (''IBD''). ''IBD'' claims CANSLIM represents the seven characteristics that top-performing stocks often share before making ...
is a method which identifies growth stocks and was created by
William O'Neil
William J. O'Neil (born March 25, 1933) is an American entrepreneur, stockbroker and writer, who founded the stock brokerage firm William O'Neil & Co. Inc in 1963 and the business newspaper ''Investor's Business Daily'' in 1984. He is the aut ...
a stock broker and publisher of ''
Investor's Business Daily
''Investor's Business Daily'' (''IBD'') is an American newspaper and website covering the stock market, international business, finance and economics. Founded in 1984 by William O'Neil as a print news publication, it is owned by News Corp and is ...
''.
In academic finance, the
Fama–French three-factor model
In asset pricing and portfolio management the Fama–French three-factor model is a statistical model designed in 1992 by Eugene Fama and Kenneth French to describe stock returns. Fama and French were colleagues at the University of Chicago Bo ...
relies on book-to-market ratios (B/M ratios) to identify growth vs. value stocks.
Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.
See also
*Alternate stock categorizations:
**
Turnaround stock A turnaround stock is a stock of a company that has hit some trouble and very well might get things better. This makes the stock go up quite a bit.
See also
* Value stock
External linksTurnaround Stocks Of The Forbes 400Value stock
* Treatment of growth:
**
**
** Earnings growth
**
PEG ratio The 'PEG ratio' ( price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth.
In general, the P/E ratio is h ...
**
PVGO In corporate finance,
Alex Stomper (N.D.Finance Theory I MIT OpenCourseWare the present value of growth opportunities (PVGO) is a valuation measure applied to growth stocks.
It represents the component of the company’s stock value that corres ...