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The Growth Stock Concept

The growth stock concept is well entrenched, with the great majority of investors long having recognized growth stocks as a major type of investment opportunity. Everybody loves a true growth stock. Other things being equal, a growth stock is definitely preferred to a nongrowth stock. Generally, you are expected to pay some premium for a growth stock. The important think is not to overpay for it. Also, you should subject a growth stock to the same rigid standards of scrutiny as you would any other stock you buy.
Nothing but the most exceptional cases should induce you to buy into companies without a solid record of growth. Avoid companies which are largely based on expectations or “projected” growth. Even a good record of growth in the past is not necessarily necessarily indicative of its future trend.
Still, basic data is important. Perhaps the single most revealing and surest yardstick of industry or corporate growth is profit margin. A widening profit margin always means better cost control, lower production costs and other management features which are classic characteristics of a growth company.
This and other “fundamentals” about a company or industry are what make a situation basically attractive. Beginners would do well to get involved only with situations sound in “fundamentals,” though a brilliantly timed purchase of even a basically unattractive stock might work out well.
The market is always in the habit of overbuying stocks of

favored groups or overselling shares of “deflated” industries. It pays not to overreach for or chase after any stock. There is nothing permanent in the growth of any industry group. Just as yesterday’s glamour stocks have become today’s wallflowers, so today’s favorites could be tomorrow’s laggards. The glamour of uraniums, airlines, oils, etc., came and went. We have just witnessed the rise and fall, temporarily at least, of electronics, bowl-ing and boating” No one knows how long the market’s current favorites such as toys, department stores, banks, insurance com-panies, and savings and loan associations will _be able to occupy the center of the market spotlight.

“America’s Fastest Growing Companies” System

Another system for uncovering growth stocks is devised by John S. Herold, Inc.’s America’s Fastest Growing Companies, a monthly publication which concentrates on companies which are compounding their earning power and value at the highest rates. It is a good place to seek young but solid companies with excellent growth potential.
The publication’s selection of companies is based on growth in net income per common share, which is undoubtedly the most reliable yardstick of measuring a company’s real growth. Of 5,000 companies screened, only those companies recording the largest and most consistent year-to-year gains in earnings have been selected. An additional requirement is that every company, when first listed, show an uninterrupted gain in annual profits for three years immediately preceding.
Why a minimum of three years? Because any lesser period would be far too short to be indicative of any reliable growth trend. Stock buyers might be deceived by the temporary prosperity of a youthful growth company.

When to buy stocks and when to sell

You may have heard of a dancer-turned-investor named Nicholas Darvas who startled Wall Street with his How I Made $2,000,000 in the Stock Market. The book distinguished itself in the simplicity of its approach. He dealt only in stocks which were “in tune with the jet age,” growth stocks. He selected only those which appeared to be developing trading activity and strength. No attempt was made to buy a stock at the bottom; instead, he took action only after it had begun to rise.
He watched his selected stocks and kept charts, which consisted of a series of “boxes.” If a stock should move up to a higher box and stay there, he would buy it. If it should move down to a lower box, he would sell. For instance, if a stock had fluctuated in a 55 to 60 range, that would be its first box. Then, if the stock should move out of that range to fluctuate in a range of 60 to 67, that would be his next box. If the stock should demonstrate its ability of staying in that box, he would buy it, and place a stop-loss order to sell a few points below the buying price. If the stock should rise, he would raise the stop-loss price. If it should fall through the stop-loss price, he would be automatically sold out.
Mr. Darvas called his method “Techno-fundamentalism,” but it is essentially a technical approach based on the idea that market is its own indicator. It is “fundamentalism” only in the sense that he used a daily market average of industrial stocks as a basic indicator of the stock market trend. Stock prices may indeed be determined by fundamental values in the long run, but he concerned himself only with what the market was doing at the moment.
Behind this seemingly rather simple approach is a much deeper theory which sees the price of any stock as a reflection, at a given moment, of the sum total of hopes and fears of investors and speculators. And this reflection is considered registered in the price of that stock at any given moment. The price of the stock itself may then serve as a stimulant for buying or selling.