When it comes to investing, some people opt to invest in dividends. Others, like Warren Buffett, attempt to maximize returns by acting as value investors. The third type of stock investors is classified as growth investors.
What Is Growth Investing?
Rather than seeking out stocks that pay nice dividends or those that are trading below their estimated intrinsic value, growth investors seek to buy equity in companies that are likely to grow more than the market as a whole over the long haul. Those who invested in companies like Amazon and Netflix 20 years ago would have fallen into the growth investor category.
Growth investing involves purchasing companies that might have high PE ratios. Those companies that are poised for great returns in the future tend to trade at a high valuation. This might seem to go against the old adage of buying low and selling high. The goal is to pick a company that will grow at a rate that will provide a great return on investment as the PE ratio comes closer to the norm. Investing in a good growth stock or two can actually change someone’s life if the price goes up enough over time.
What Makes a Good Growth Investment?
Generally speaking, companies that are set to disrupt the marketplace can be good investments. Both Walmart and Amazon did much to disrupt the retail market. Those who purchased the stock of these companies around their IPO dates did quite well for themselves.
Companies that disrupt the market and have a repeat purchase business model can do quite well. Retail establishments fall into this category. A person might shop at Walmart a couple of times a week. The same person might get a cup of coffee four or five times a week at a Starbucks. These companies are good at bringing in revenue streams from their customers regularly. Another repeat purchase model would be a subscription service like Netflix, which charges customers a monthly service fee that comes inconsistently. As inflation kicks in, Netflix can raise its prices until customers start to fall away. Then, the company can adjust. That’s not really happened yet in the case of Netflix.
Another sign that a growth stock is a good bet is an engaged leadership. Even better is a leadership team that has skin in the game. In other words, the leadership should have large investments in the companies they run. The better the company does, the better the CEO and other officers will do. Therefore, they’ll run the company at the highest level they can.
Growth investing is one of many options for making money in the stock market. It’s not necessarily the best option for everybody. However, it can really pay off in the long run if one or two of the growth stocks purchased become real winners.