3 Things To Look At When Analysing A Growth Stock
What is a Growth Stock?
It is a stock that grows in value.
Commonly, here is what most people do. They look for stocks that have rose substantially in prices. Often, they would appear in major newspapers, blogs, social media and even in your daily conversation with friends and relatives. It is not hard to find them and you might be tempted to get into them before it is too late. Doesn’t it sound familiar?
That’s exactly how most people lost money in the stock market as they were always late to the party. It is known as the Greater Fool Theory where people attempt to ‘buy high to sell even higher’. This works ‘perfectly’ unless you are not the ‘Greatest Fool of All’ in the stock market. Regrettably, here was what most people did in the end – ‘Buy High, See it Drop, and Sell at a Loss’.
So, what makes savvy investors different?
When most people are ‘buying’, savvy investors who have already bought the stocks would not buy anymore. Instead, they would hold onto them and wait for the right opportunity to sell which is when prices are insanely overpriced. At the end, the big picture is, ‘Wealth is being transferred from most who are speculating to savvy investors’.
Thus, I think it is beneficial to us to find out what a growth stock is based on the definition of a savvy investor (not a speculator). For the beginning of this article, I wrote a growth stock is one that grows in value. So, how did a stock actually grew in value? Here, in this article, I’ll list down 3 key places to look at so that you can spot a growth stock.
Does the stock have a track record of growing profits consistently? A growth stock is one that has and is attractive to investors. Often, savvy investors look at a stock’s profit figures over the last 5 – 10 years, not just its most recent and latest figures. Why? This is because of the word ‘Consistency’ as investors are interested to know whether a stock has the track record of growing profits in both good and bad economic and market situations.
Does the stock have strong cash flow management and generate consistently positive cash flow from its operations? Savvy investors would be looking at a stock’s cash flows together with its profit figures. A highly profitable stock is and should be one that has abundance in cash flows. This is important as we want to know whether a stock has the ability to fund its plans, projects, and strategic acquisitions to grow in the future. Here is a thought: ‘If a stock has cash flow problems (high in debt, low in cash), does it have the flexibility to finance its expansionary and investment activities?
In most cases, a stock’s annual reports contain its Chairman’s Statements, its CEO’s statement, and Management’s Discussion & Analysis. The writings of these statements are there for a handful of purposes. For instance, they will provide a report on what a stock has achieved in the past, its condition of the businesses or industries, and what it intends to do to grow and make more money in the future. Most people treat these statements as ‘mumbo-jumbo’. That’s very unfortunate as they contain a wealth of information to help you assess the stock’s growth plans in the future.
The Foolish Takeaway
The 3 things mentioned have helped me to easily spot growth stocks and to avoid bad stocks that are turned out to be costly investment mistakes.