New York - Investing in a fast-growing company is often a rewarding strategy that can help you achieve capital appreciation.
Evaluate growth stocks as follows:
- Volume Increases - The company's products or services should be sold in increasing amounts of high unit volume growth. This may be due to the fact that the overall industry is growing at more than historical rates or that they have talented managers and a strategy to grow faster than the rest of the industry.
- Great Management - The company should have an imaginative and experienced management team. Experience is a relative term as firms in new industries may not have "any experienced managers."
- Understand the Growth - Is the growth coming from new products or acquisitions and accounting methods. The-Adviser.com believes that a true growth stock is the result of new products and not by acquisitions. Companies that are growing by acquisitions should be viewed as a situational stock and be analyzed separately.
- Review PE Ratio - You need to review the stock's price earnings ratio in relation to its rate of growth, its current trading range in relation to its historical PE ratio and where it is trading relative to competitors. There is not specific formula that we follow. We like to judge each stock on a case-by-case basis.
You should consider selling a growth stock if it fails to meet a milestone such as a specific level of earnings growth or if it has reached an unduly high price earnings ratio.
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