The Conditions For Growth of Good Stocks

By Omar L. Caban

A smart investor is always on the look out for growth. Share prices are directly proportionate to the respective company's worth in the stock market. So, it is always wise to seek companies which are rising in value. When you hold on stocks of companies that manifest relentless growth, handsome stock market returns are achieved.
But in this aspect don't always focus on the projected growth rates. If all of a sudden the stock market start to lose faith in the said company's prospects, the result can be horrific.
The characteristics of the best growth stock are a combination of potential upward growth along with sizable safety margin. They ought to satisfy three conditions:
1. A good growth rate
It is preferable if the company has fast growth instead of a slow one when the rest of the factors are equal. This is because even the minute relative changes in growth rate can make a substantial difference to the investors.
2. Sustainability
Stretch your vision beyond the growth estimates. Not the 'estimate' but the 'sustainability' of growth is more important in order to achieve great returns. This is a common mistake done by even the clever growth investors. They focus so much on the growth rate that they stand to ignore the logical sustainability of that growth. This myopic vision is the prime reason behind the tech bubble. People get allured by the high growth projections but fail to notice that the company has negligible or few competitive advantages. When the bubble pops, the company disappears and the investors bite the dust.
3. A good price
Don't end up paying far too much for growth. It makes sense if occasionally you pay a hiked up price, because you can rely on the sustained growth of the company. But take care not to defy logical calculations that it makes virtually impossible for you to uphold even a marginal profit even in the situation where the growth is not hampered. It is a good idea to select a growth stock which is fairly priced or undervalued. A discounted cash flow (DCF) calculation will aid you to calculate the fair value of a growth company.
These three central ideas shouldn't lead you to think that value investment strategy is to look for unpopular penny stocks You need to look for growth stocks from strong companies that possess reasonable positive growth prospects. And when you get growth stocks at a reasonable price offering sustainable growth, you can rest assured about your long term profits.
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