Saving & Investing
Finding Growth Companies/ March 14th, 2011
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 tipsFormer Fidelity Magellan Manager Peter Lynch is a great believer in gaining investment ideas from day-to-day experiences. In his book, "
For growth investors, steady sales and earnings growth is paramount.
ScreeningUsing 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 processMany 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 you shop at a particular store and it always seems crowded, it may be worth investigating it as a possible investment idea.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.