Growth stock
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Growth Stocks in finance are stocks that appreciate in value and yield a high return on equity (ROE). Analysts compute ROE by taking the company's net income and dividing it by the company's equity. To be classified as a growth stock, analysts expect to see at least 15 percent return on equity.
Morningstar uses a methodology to rank mutual funds into growth, core and value. It is done by computing
Style score = growth score - value score
Half of the growth score depends on high projected earnings growth, and other half depends on growth measures (historical earnings, sales, cash flow and book value). The value score depends on projected P/E as well as P/B, Price to sales, price to cash flow and dividend yield. [1]. High style-score funds (about a third) are regarded to be growth funds whereas those on the other end are termed value funds.
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[edit] Growth vs. Value investing
Since 1982, the growth stocks have beaten value stocks during:[2]
- 1982
- 1985
- 1987
- 1989-91
- 1995-99
- 2007
During the rest of the years, the value stocks have done better. Note that the 5 years preceding the dot com bubble burst, growth stocks did better than value, since then value stocks have generally done better.
Some advisors advise investing half the portfolio using the value approach and other half using the growth approach.[3]
[edit] See also
[edit] Footnotes
- ^ ¥FactSheet_StyleBox
- ^ TD AMERITRADE: Planning & Retirement > Growth vs. Value: Two Approaches to Stock Investing. planning.tdameritrade.com. Retrieved on 2008-06-13.
- ^ Bernstein - Multi-Style Investing: A Tale Of Two Investment ?Styles?
[edit] External links
- Ratios converge between growth and value stocks
- How to Find the Ultimate Growth Stock
- DuPont: Despite Earnings Miss, Still a Growth Stock
[edit] References
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