Growth stocks are shares in companies that are typically well-established, with a good growth history behind them. Expert stock pickers usually agree that stock in these companies will continue to appreciate at a steady pace. Aggressive growth stocks are expected to grow more rapidly, but they tend to cost more and may carry significant risk.
1. Look for companies with a track record of strong earnings growth. A company should have an earnings-per-share growth rate of 20 percent or more for several consecutive years to be considered aggressive, although lower earnings may still qualify a company as a growth stock candidate.
2. Analyze the company's financial position by performing a fundamental analysis on the stock you are considering. The company should demonstrate solid financial performance with a low debt ratio, a strong market position, and it should be continuing to grow. A fundamental analysis will tell you how strong the company’s financial position really is. It can also help you avoid making a serious mistake by buying stock in a company that is struggling.
3. Pick stocks that have a return on equity greater than 15 percent. This implies that the company will have the cash it needs to continue funding growth in the coming years.
4. Find stocks with a price/earnings ratio between 20 and 40 percent. These stocks are more apt to be priced reasonably and viewed favorably by investors.
5. Evaluate market macro trends when choosing your stock. A company that is well positioned for the next big trend, such as an advance in technology, a pharmaceutical breakthrough, alternative energy or some innovative new product, may do well in the immediate future. Look for stocks from companies likely to attract new customers and avoid buying stocks if it seems the company’s glory days have passed.
- Technology stocks are often recommended as good choices for aggressive growth. These are not the only growth stocks, but they’re a good starting point.
- Losing some or all of your investment in the stock market is always a possibility, no matter how carefully you choose. For best results with aggressive growth stocks, be prepared to wait out market fluctuations to give your stock time to grow.
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