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Growth Stocks
In looking at a stock, one tends to look at earnings growth and revenue growth. Earnings growth usually is the paramount consideration, and investors often look not just at a stock's P/E ratio, but at the ratio of price to the anticipated growth. This is one reason that when companies report slower-than-expected earnings growth, they often get pummeled on Wall Street. One way to relate share price to expected growth is to calculate the projected earnings growth (PEG) ratio. Simply divide the P/E by the company's projected earnings per share growth rate over the next one, two, or more years. An answer of less than 1 is considered a signal that the stock may be undervalued. Remember, though, that clairvoyance is as rare on Wall Street as elsewhere, and predicted rates of growth are just that -- predictions. Staying in the realm of what is known, many investors like to see a company that has achieved consistent earnings growth; earnings growth from increased revenue rather than cost-cutting (although of course they like cutting costs); earnings growth that exceeds population growth and inflation; and earnings growth even in hard times. As for revenue growth, many of the same ideas apply, with the caveat that if revenue is growing much faster than earnings it could be a sign of aggressive discounting, out-of-control costs, unmanageably fast growth or other problems. |
