Growth Investing

Manav A. Damai | June 7, 2021

Introduction:

Growth investing is a stock-buying strategy that looks for companies that are expected to grow at an above-average rate compared to their industry or the broader market. Growth investors tend to favor smaller, younger companies poised to expand and increase profitability potential in the future. Growth investors often look to five key factors when evaluating stocks: historical and future earnings growth; profit margins; returns on equity (ROE); and share price performance.

Key Factors:

Strong historical earnings growth: Companies should show a track record of strong earnings growth over the previous five to 10 years. The minimum earnings per share (EPS) growth depends on the size of the company.

Strong forward earnings growth: An earnings announcement is an official public statement of a company’s profitability for a specific period—typically a quarter or a year. These announcements are made on specific dates during earnings season and are preceded by earnings estimates issued by equity analysts. 

Strong profit margins: A company’s pretax profit margin is calculated by deducting all expenses from sales (except taxes) and dividing by sales. It’s an important metric to consider because a company can have fantastic growth in sales with poor gains in earnings—which could indicate management is not controlling costs and revenues. 

Strong return on equity (ROE): A company’s return on equity (ROE) measures its profitability by revealing how much profit a company generates with the money shareholders have invested. It’s calculated by dividing net income by shareholder equity. A good rule of thumb is to compare a company’s present ROE to the five-year average ROE of the company and the industry. Stable or increasing ROE indicates that management is doing a good job generating returns from shareholders’ investments and operating the business efficiently.

Strong stock performance: In general, if a stock cannot realistically double in five years, it’s probably not a growth stock. Keep in mind, a stock’s price would double in seven years with a growth rate of just 10%. To double in five years, the growth rate must be 15%—something that’s certainly feasible for young companies in rapidly expanding industries.

 

Annualized Return

Annualized Risk

Max Drawdown

Sharpe Ratio

All

15.19

17.72

36.84

0.52





In the above Graph, I have selected Financial, Banking and FMCG Sector. As its Mentioned already in the graph that the Annualize Returns is around 16%, Annualize Risk is around 18%, Max Drawdown is around 36.84% and lastly the Sharpe Ratio is 0.52.

As we can see that Portfolio is higher than Nifty but  looking at Sharpe Ratio which is 0.52 so it can be consider that these sectors may be sub optional, as we all know that the Sharpe Ratio with 1 is consider acceptable to good Investors.


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