How to Identify Growth Stocks
(3 of 7)
How to Identify Growth Stocks
Identifying a growth stock is a fairly straightforward process.
The price/earnings ratio
You can begin by reviewing the price/earnings ratio (P/E) in newspaper stock listings. The P/E ratio is the price of the stock divided by its earnings per share. It signals the value that investors place on the anticipated earnings of the company. Most growth stocks have P/E ratios of 20 or more—sometimes much more.
Things To Know
- High price/earnings ratios, rapid appreciation, and sustained appreciation are among the signs of a growth stock.
- The issuing company reports high earnings and growth in earnings.
The stock’s price
A review of the history of the stock’s price reveals both rapid appreciation and sustained appreciation over time. The stock’s price and the company’s earnings have continued to grow regardless of the economic cycle. On average, an economic downturn affects this stock less than it affects the prices of stocks issued by other companies. Remember, however, that history is no guarantee of future performance.
Signs from the company that issued the stock
The corporation that issues growth stock continues to report above-average earnings, as well as growth in earnings. Since it focuses on growing the company, it tends to reinvest considerable earnings into additional growth. And this company pays out relatively small dividends—or none at all. Instead of profiting from dividends, you "earn" money as the value of your stock increases.
