Every investor wants to locate growing stocks for investment. While there are different ways to go about locating growing stocks, the goal of investors is the same.
There are two schools of thought when it comes to choosing stocks that are expected to climb in price. These schools are value and growth. Value and growth are different ways of locating winning stock market investments.
Let’s first look at the differences between value and growth investing then drill down into growth stocks with specific examples for you to consider for your portfolio.
Growth and value are the drivers that lift the price of stocks over the long run. Most investors like to think of themselves as either a growth investor or a value investor. It is important to realize that growth and value are the two sides of the same coin. The Oracle of Omaha, Warren Buffett says that growth and value are “joined at the hip”.
The main difference between growth stock investors and value investors is how they locate stocks to trade.
What I mean is that growth investors like to look for stocks that are soaring higher and purchase on the way up. At the same time, value investors generally look for stocks whose price has been beat down and purchase shares at low, discounted levels.
Growth investor’s attention is on companies that they think will experience quicker than average growth as measured by revenues, earnings, or cash flow.
In addition growth investor’s focus on the system a company runs its business.
For example, growth-oriented companies are more likely to reinvest profits in expansion ventures or purchases, instead of using them to pay out dividends to shareholders.
It is critical to note that growth stocks are expected to offer the potential for higher returns, they also generally represent a greater risk when compared to value stocks.
They tend to do better than the overall market when stock prices, in general, are rising, while underperforming the market as stock prices fall, taking into account that past performance does not guarantee future results. As a result, investing in growth stocks requires a slightly higher tolerance for risk, as well as a longer time horizon.
While the philosophy differs, both value and growth stock investor’s ambition is to locate growing stocks to profit. It doesn’t matter how you define growth stocks, the end aspiration is to create a return on the investment.
Investors often get perplexed about how to spot a growth stock. This is chiefly true during bull markets when the whole market is climbing higher. During bullish times, it becomes more complex to determine whether or not a stock is a growth stock or n
There’s an easy to use tactic developed by professional stock market analysts to determine whether or not a stock can be categorized as a growth stock.
This growth stock trick determines the multiple of the stock. The multiple is what investors are willing to pay for the future earnings.
The formula is price equals eps times the multiple. Symbolically this is P=eps x m. The company’s growth rate is the most important factor behind the multiple.
Stocks can trade up to a multiple that is twice the long term growth rate before most analysts remove it from their growth stock portfolio. Anything higher and it’s basically too expensive to be a strong growth stock.
An example would be a stock that is growing its earnings at 10%, the stock price could be 20 times earnings and most everyone would still be correctly defined as growth stock.
Here Are 3 Growth Stocks You Need To Know
- Group 1 Automotive (NYSE:GPI)
One wouldn’t expect an automobile dealer chain to be a leading growth stock, but Group 1 has been on fire.
The company is riding a wave of consolidation in the auto dealer business. U.S. dealerships fell in number from 17700 to 16696 by December, 2014. This paved the way for the large dealer groups like Group 1 to thrive.
Group 1 has expanded from 95 shops in 2010 to 148 shops today. What’s most excitingly bullish is the fact that revenue has climbed an average of 16% a year since 2010. This is very impressive growth.
The company is well diversified across brands with no single brand being the bulk of sales. This fact prevents fickle consumer tastes from affecting the growth trajectory.
On July 23, Group 1 reported record second quarter 2015 adjusted net income of $47.9 million, a 19.9 percent increase over the prior year.
Adjusted diluted earnings per share of $1.98 were also an all-time record for any quarter, and a 34.7 percent increase from the comparable, adjusted prior-year period.
The quarter included non-recurring net after-tax charges of $1.6 million reflecting non-cash asset impairments of $0.8 million, resolution of a prior period legal matter of $0.6 million, losses from flood damage of $0.6 million, and severance costs of $0.2 million, partially offset by a gain on a dealership disposition of $0.6 million.
GAAP net income and diluted earnings per share were $46.3 million and $1.91, respectively.
Earl Hesterberg CEO commented on the results, “We are pleased to report another record-setting quarter. The combination of continued solid top-line growth in the United States and the United Kingdom, combined with improved expense leverage, delivered all-time record adjusted diluted EPS of$1.98. We are particularly pleased with our 14 percent increase in both U.S. and U.K. Same Store used vehicle sales and the acceleration of our U.S. parts and service revenue, which was up 8 percent on a Same Store basis. Finally, although overall market conditions have continued to deteriorate in Brazil, the combination of our brand profile and cost cutting initiatives allowed us to deliver a pre-tax profit in that market this quarter, which is an impressive accomplishment by our Brazilian operating team.”
Analysts are expecting earnings to leap greater than 21% in 2015 and 1o% in 2016 hitting $7.83 per share.
Increasing consumer confidence combined with a rapidly improving economy should continue to power this leading car dealer
- CVS Health (NYSE:CVS)
This gigantic drug store and health care services company boasts a Price Earnings Ratio of 21 and a market capitalization of $128 billion. There are over 70 million members of its pharmacy benefits management services.
CVS is actively expanding its “minute clinic” concept with a target number of 1500 by 2017. In addition, its partnership with Cardinal Health to purchase generic drugs at discounted prices is expected to continue to boost profit margins.
Investors have been showing the love to CVS with shares up 17% this year and nearly 50% over the last 52 weeks.
Earnings are released on Thursday with the average analyst estimate of $1.20 a share on revenue of $37.18 billion, a year-over-year increase of 6% and 7%, respectively.
For the full year ending in December, earnings are projected to climb 14% year over year to $5.16 a share, while revenue of $150.6 billion calls would be an 8% year-over-year rise.
Obama care and an aging population is expected to keep the growth catalysts lifting the shares over the long term
- Jarden (NYSE:JAH)
This under the radar growth story specializes in consumer brands and is rapidly growing via an aggressive acquisition strategy. Jarden boasts a market cap of $11.5 billion and a P/E ratio of 19. It owns over 120 consumer brands and is in the process of buying the $1.35 billion maker of plastic plates, the Waddington Group.
The company has been incredibly successful with sales growing at an average of 30% per year since 2002.
This rapid growth is expected to slow down to 3 to 5% annually, however Jardin plans on lifting earnings by a minimum of 10% per year by acquisitions and improving margins.