What is a Growth Stock?

by Investing School on December 31, 2010

Growth stock is a financial term that refers to stocks that belong to companies that have had a history of consistently achieving growth rates beyond projected benchmarks. They also have high profitability ratios.

In order to calculate this, analysts will compute the ROE or return on equity by dividing the company’s net income into average common equity. To be regarded as a growth stock, analysts require that companies must reach at least a 15% or more return on their equity. A common method to approach this calculation is done with “CAN SLIM.” This is a mnemonic device that details and describes the characteristics performing stocks have before they report their biggest gains. They are as follows:

C = Current Earnings should be up 25%.
A = Annual earnings should be up 25% in the last 3 years.
N = New product or service that fuels the earnings growth.
S = Supply and demand can be viewed by looking at the trading volume.
L = Leader or laggard. These stocks should be the leaders in their industry.
I = Institutional sponsorship means the ownership of the stock in mutual funds.
M = Market indexes. One should invest when the Dow Jones, S & P 500 and NASDAQ are in up trends.

Growth stock is also sometimes referred to as “glamour stock.” Growth stocks do not generally pay dividends because the company wants to reinvest the returns it receives on stocks. Investors will often find that most technology companies are considered to be growth stocks.

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