Growth investing

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3. Traditional characteristics of a growth stock

Before charging into the anatomy of a growth stock, it is worth considering how and why they 'happen'.

There seem to be two main drivers:

1. New technology

   New technology invariably plays midwife to growth stocks. In the nineteenth century it was railroads. In the 1930s and 40s motor cars, in the 1950s and 1960s mainframe computing, then pharmaceuticals, then biotechnology and software, and now internet companies of all kinds and the network companies behind the internet.

   As new growth stocks are created, so their predecessors languish. Which is one reason why you can never take your eye off the ball.

2. Domination of a niche

   Some growth companies dominate niches in relatively humdrum industries.

   • Xerox was virtually unchallenged in the photocopier industry for years.
   • Rentokil managed several years of above average growth in the decidedly unglamorous field of pest control and damp-proofing.
   • Coca-Cola has had a sustained period of international growth for over 70 years.

   The secret seems to be in consolidating a fragmented service industry, or rolling out a proven 'franchise', and steamrolling whatever competition pops up.

Note the difference between a growth industry and a growth stock:

• Just because an industry as a whole is growing it doesn't mean that growth stocks are bound to emerge.
• If the barriers to entry are low, new companies will come into the marketplace, making it difficult for any one company to increase earnings and profitability.

1. What is a growth stock? 2. Comparison with value investing 3. Traditional characteristics of a growth stock 4. Anatomy of a growth stock - Peter Lynch 5. Ten dos and don'ts from Peter Lynch 6. Jim Slater - The Zulu Principle 7. Earnings growth 8. The PEG factor 9. Competitive advantage 10. Do growth stocks have to be small? 11. A short diversion into internet stocks 12. When to sell a growth stock 13. Other factors 14. Case study of a growth stock - Sage 15. Conclusion

• Value Growth Investing
• One Up on Wall Street