Growth Investing

Growth Investing Definition

Growth Investing refers to capital allocation in potentially high earning companies such as small caps, startups etc. that grow much faster than the overall industry or mature companies. As the returns in such investment is high, the risk faced by such investors is higher too.

Growth Investing

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Source: Growth Investing (wallstreetmojo.com)

Examples of Growth Investing

Example #1

Portfolio A and Portfolio B consist of four stocks each. At the same time, portfolio A has given a return of ~28% and portfolio B has generated a return of ~7.5% during the bull marketBull MarketA bull market occurs when many stock prices rise 20% from a recent low for an extended period. In addition, it is expected that prices will continue to go up. The bullish phase marks an increase in investor's confidence, corporate profits, reduced unemployment, and an improving GDP.read more scenario. Portfolio A consists of blue chips and growth stocks, while portfolio B consists of defensive stocksDefensive StocksA Defensive Stock is a stock that provides steady growth and earnings to the investors in the form of dividends irrespective of the state of the economy as it has a low correlation with the overall stock market/economy and is therefore insulated from changing business cycles.read more, whose profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more grows less than the GDP.

The index has generated a return of 13.5% during the time span. Thus, we may conclude that during good times portfolio A will surpass the index return during a good bull market, while defensive stocks will generate a return which is less than the index.

Example #2

During the recession, we have seen that the price to earnings metrics tends to erode, irrespective of the quality of the stocks because of the negative investor’s sentiment. Thus, richly valued blue-chip stocks become cheaper because the market will discount the overall sentiment and will drive the price lower. On the other hand, slow growers or defensive categories tend to remain in the same range.

The reason is that irrespective of the market conditions, the price to earningsPrice To EarningsThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more multiples or other valuations metrics remains low for these categories of stocks. So, during economic recessionsEconomic RecessionsEconomic recession is when economic activity is stagnant, and there is contraction in the business cycle, over-supply of goods compared to its demand, and a higher unemployment rate resulting in lower household savings and lower expense, inflation, higher interest rate and economic crisis due to higher fiscal deficit.read more or slowdown, these slow growers resist the drawdown of the portfolio.

Advantages

Disadvantages

This has been a guide to what is Growth Investing and its definition. Here we discuss the various components of growth investing stocks along with the examples. You can learn more from the following articles –

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