Growth shares

Growth shares
See also

Growth shares - are a special class of shares created (usually) by unlisted companies to provide equity incentives to management and key employees. Growth shares it is a selecting share with excellent growth prospects and benefit from the compounding effect as their earnings per share (EPS) increase year after year[1]. Growth shares (or secondary shares) highly regarded and with excellent growth potential. For example, many of the IT shares could be considered growth shares. These are shares with little earnings history but with strong future earnings potential[2].

Differences between growth shares and value shares

A share is considered a growth share when it grows faster and at a higher level than the overall stock market. A growth share performs better than its peers in categories such as sales and earnings. Value shares are shares that are priced lower than the value of the company and its assets- you can identify a value share by analyzing the company's fundamentals and looking at the key financial ratios. Growth shares tend to have better prospects for growth for the immediate future(from one to four years), but value shares tend to have less risk and more steady growth over longer term[3].

Criteria for choosing growth shares

There are hundreds if not thousands of shares on the market. In order to determine the probability of investment success, you can be guided by the following criteria[4]:

  • Make the right comparison- Investor should measure the growth of a company against something to figure out whether it has a growth share.
  • Checking out a company's fundamentals- word fundamentals in the world of share investment refers to the company safety financial condition and related data. When investors do fundamental analysis, they look at the company's fundamentals- it's balance sheet, income statement, cash flow, and other operational data. Main numbers investor should look at in case of growth shares are:
  • Sales- it should be at least 10 percent higher than last year.
  • Earnings- they should grow at the same rate as sales(or, hopefully, better)
  • Debt- Is the company's total debt equal to or lower than the previous year?
  • Looking for leaders and megatrends- a strong company in a growing industry is a common recipe for success. A megatrend is a major development that has huge implications for much of society for a long time to come. A good example is the advent of the Internet. For the growth investor, strategy becomes clear. Find companies with solid fundamentals that are well-positioned to benefit from these megatrends.
  • Considering a company with strong niche- Companies that have established a strong niche are consistently profitable. Look for a company with one or more of the following characteristics:
  • A strong brand- Companies such as Tesco with a strong and stable brand.
  • High barriers to entry- United Parcel Service have set up tremendous distribution and delivery networks that competitors: can't easily duplicate.
  • Research & Development (R&D)- Companies such as Pfizer spend a lot of money researching and developing new pharmaceutical: products.

Typical features of investment in growth shares

Characteristics of investment in growth shares in brief[5]:

  • Growth shares are an excellent investment area to focus upon and apply the Zulu Principle of becoming relatively expert.
  • With the right selections, future capital gains, helped by the power of compounding, can be very substantial indeed.
  • A 'margin of safety' can be established by buying growth shares with low PERS about their forecast EPS growth rates.
  • Running profits, with rare exceptions, makes good sense and also a very tax-efficient policy.
  • Very little time should be spent worrying about the market as a whole. Investment is the art of the specific and selection is far more important than timing.

References

Footnotes

  1. Slater J., (2010), page 11
  2. Hirsch B., (2005), page 109
  3. Kassam I., Mladjenovic P., (2010)
  4. Kassam I., Mladjenovic P. (2010)
  5. Slater J., (2010), page 17

Author: Klaudia Kazienko