Growth investing

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11. A short diversion into internet stocks

In the late 1990s and 2000, it was common to see internet companies referred to in the press as 'growth stocks'. If 'growth stock' simply meant 'a company in a growing industry which has an investor following' then dotcoms could rightly claim the mantle. After all, internet useage was growing fast, and share prices of companies sprinkled with web pixie dust advanced rapidly.

Sure enough, investors who got into these stocks early and made their exit before the bubble burst in 2000 made huge capital gains. Those who arrived late, bought at the top, and failed to see the imminent crash, lost fortunes. Success and failure was all about market sentiment and had nothing to do with underlying fundamentals.

Growth stock investing - real growth stock investing - assumes a relationship between share price and the rate of a company's earnings growth. That relationship did not exist in the heyday of dotcom mania and, arguably, is still absent.

• Currently, very few internet companies make profits. Many have already gone out of business or had to be rescued.
• The capital markets and stock markets have lost their appetite for failing internet companies. Companies which are running out of cash may find it very difficult to get the infusions of fresh capital that they need to see them through to profitability.
• Traditional offline retailers have become more serious competitors to online newcomers.

Nobody is saying that you cannot make money with internet companies. Nobody is saying that these companies are inherently bad businesses. What does need to be asserted is that a company without earnings growth cannot properly be regarded as a growth stock, at least according to the traditional definition.

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

• Valuegrowth Investing - an Investor's Guide
• One Up On Wall Street