David Einhorn is Wrong: GMCR is a Buy

David Einhorn is Wrong: GMCR is a BuyGrowth 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.

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About the Author

ChuckCarnevale
Charles (Chuck) C. Carnevale – Co-Founder and Chief Investment Officer, has been working in the securities industry since 1970. He has been a partner with a private NYSE member firm, the President of a NASD firm, and a Vice President, Regional Marketing Director for a major American Stock Exchange listed company, and he was an Associate Vice President and Investment Consulting Services Coordinator for a major NYSE member firm. Prior to forming EDMP, Inc., he was a partner in a 30-year-old established registered investment advisory in Tampa, Florida. Chuck holds a Bachelor of Science in Economics and Finance from the University of Tampa. Chuck is a sought-after public speaker who is very passionate about spreading the critical message of prudence in money management. Chuck is a Veteran of the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor Medal.