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Finding Growth CompaniesAmy Buttell
With thousands of companies listed on the different stock exchanges, how do you locate the superior growth companies that make the best long-term investments? Sources of investment ideas are numerous.
Business publications, personal finance websites, brokers, friends, business associates, and even your own day-to-day experiences are all sources of investment ideas. You never know when a product that you purchase and use or even a tip from a business associate may put you on the track of a solid growth company.
The trick is to realize that an investment idea is just that. Getting excited about a company or its products is just the first step in deciding whether the company you're interested in is a superior growth company.
A more formalized way to search for investment ideas are screens on personal finance and investing websites. Screening is a way to filter through the universe of companies available for investment using specific criteria.
Ideas and tips
Former Fidelity Magellan Manager Peter Lynch is a great believer in gaining investment ideas from day-to-day experiences. In his book, "One Up on Wall Street," Lynch describes how a night's stay in a motel yielded an investment idea that eventually paid off handsomely for the investors in Fidelity Magellan.
He counseled investors to be aware of the products and services that they buy and use on a continual basis. For example, if you like to shop at a particular store and it always seems crowded, it may be worth investigating as a possible investment idea.
In a similar fashion, ideas that you hear from family, friends, and even brokers can be a rich source of investment ideas. Many investors gather ideas from their daily newspaper and business publications such as The Wall Street Journal, Investor's Business Daily, BusinessWeek, Forbes and BetterInvesting, among others.
Personal finance and investing websites are another potential basis of investment ideas. Many print publications also have websites. Although some investing websites are restricted to members or subscribers, many are free.
Other investors look to investing e-mail lists for investing ideas. Some are filled with hype where investors tout penny stocks, but others focus on various investing philosophies where investors share legitimate ideas.
Using websites or investing software programs for screening can be an effective method of finding investment ideas. Many different personal finance and investing websites offer a variety of screening capabilities.
Screening programs are also available. Many accompany or complement company data files that are available on a subscription basis from investing associations, data providers, or companies.
Variables differ in screening programs and sites. Usually free screening programs are more basic than those provided to members or subscribers of a particular site.
The screening process aids you in narrowing down the investment universe. You can screen for companies of a certain size, in particular industries that meet set historical growth rates.
Other possible characteristics you can screen for include historical P/E (price to earnings) ratios and analysts' predicted earnings growth rates. Using screens, you can compare companies with others in the same industry to find the best of the best.
Each investor seeks particular investing qualities that are important. For growth investors, steady sales and earnings growth is paramount. Investors seeking to diversify their portfolio can screen for companies of a certain size or in a certain industry.
The testing process
Many investors maintain a list of possible investing ideas culled from the above sources. They may keep an actual paper file folder for articles cut out of newspapers, newsletters, and magazines. On their computer, they also can maintain a file of investing ideas.
Once you develop a good-sized list, it is time to sort the wheat from the chaff. Using the Internet or a hard copy source such as Value Line Investment or Standard & Poor's Reports at the public library, spend a few minutes looking at each company.
Basically, you're looking for these key criteria:
- Five years of history as a publicly traded company
- At least five years of reasonable growth in sales and earnings
If a company doesn't meet these simple criteria, drop it and move on to the next company. This simple selection process should narrow your list down considerably.
With this list in hand, you can subject your companies to other tests. Check to see if growth rates are strong and consistent.
Look at recent company news to see what's been happening to the company's business. Bad news may merit further investigation.
Some investors go an extra mile, reading company annual reports and Securities and Exchange Commission filings and examining company financial statements. These steps aren't necessary to satisfy yourself that a company meets the growth company test, but some investors who are curious take on these additional tasks.
Growth at a reasonable price
Then, move on to determine whether the stock is selling at a reasonable price criteria; we'll discuss this idea in a future article. It's not just quality growth companies we're after—it's quality growth companies at a reasonable price.
Even if a superior growth company doesn't meet your price target, don't forget about it. Many investors maintain a "watch list" of high-quality growth companies that are currently overpriced.
Stock prices are volatile. The stock prices of many companies can rise or fall by as much as 50% or more in one year's time. Yesterday's overvalued stock may be today's bargain.
For example, many growth investors found a wealth of investing opportunities after stock prices plummeted in late 2008-early 2009. Investors seeking high-quality growth companies selling at reasonable prices often are rewarded for their patience.
This article was originally published by BetterInvesting. Since 1951, BetterInvesting has helped more than five million people become better, more informed investors. BetterInvesting helps its members build wealth through educational webinars, Web-based mutual fund and stock tools, in-person learning events, publications, an active online community, and software. For more information, visit the website or call 877-275-6242.
Neither CUNA nor the author of this article is a registered investment adviser. Readers should seek independent professional advice before making investment decisions.