Growth stocks are defined as companies with high rates of change of earnings growth of 15% to 20% or better. Growth stocks offer the potential for share prices to rise in lockstep with their profit growth in the long run. Therefore, the PEG ratio formula (price equals growth rate) tends to be the most appropriate formula used to value growth stocks. However, due to the exponential nature of compounding large numbers, PEG ratio forecasts are capped at 40%.
Because of the higher valuation typically awarded to fast growth, growth stocks offer the potential for greater capital appreciation. On the other hand, they also offer higher risk. First of all, they tend to command much higher than average PE ratios, and second, achieving very high levels of growth is very difficult to sustain. Consequently, forecasting future earnings growth is more important with high growth stocks than any other class of stock. Also, the average growth stock typically plows all of its profits back into the company to fund its future growth, instead of paying dividends.
A Look Back At Warren Buffett’s Legendary Washington Post Investment
Throughout his long investment career, Warren Buffett has made thousands of investors and bought tens of businesses. However, a couple of examples really stand out. Q1 2020 hedge fund letters, conferences and more These companies stand out for a range of reasons. The Nebraska Furniture Mart, for example, stands out because it was such a Read More