Introduction:

Growth stocks refer to stocks in firms that are likely to grow at a higher rate compared to other firms in the stock exchange market. These stocks receive much demand from investors due to their ability to give high returns in the form of capital gains. While value stocks usually pay out earnings in the form of dividends to shareholders, growth stocks tend to reinvest their earnings back into the business.

Focus Points:

Understanding Growth Stocks: Growth stocks are characterized by their potential to outperform the market due to higher-than-average revenue and profit growth. Unlike value stocks that offer dividends, growth stocks reinvest earnings to drive expansion.

Key Metrics for Identifying Growth Stocks: To spot promising growth stocks, focus on three main metrics: consistent revenue growth, high and improving Return on Equity (ROE), and rapid Earnings per Share (EPS) growth. These indicators suggest a company’s robust market position and profitability. Learn Stock Valuation Here!

Blue Chip Growth Stocks Example: Companies like Apple Inc., AstraZeneca PLC, and Amazon Inc. exemplify growth stocks with substantial financial security and a proven growth track record. They continually innovate and expand, making them prime candidates for long-term investments.

Calculating Growth Rates with CAGR: The Compound Annual Growth Rate (CAGR) formula is essential for assessing the average annual growth of an investment over multiple years. It provides a clear picture of a stock’s growth trajectory, filtering out short-term volatility.

Investment Implications: Growth stocks are ideal for investors looking for significant returns through capital appreciation. By analyzing revenue growth, ROE, and EPS growth, and understanding growth rates via CAGR, investors can make informed decisions about potential high-growth investments.

How to Find Growth Stocks:

Finding growth stocks requires analyzing specific characteristics that define their growth rates. Here are three crucial metrics:

• Revenue Growth: If revenues increase consistently over time, it can be concluded that the company is gaining a larger market share or releasing new products that are popular. Business organizations whose sales records have shown an upward movement are referred to as growth stocks. Revenue growth does indicate that the company is not only sustaining its customers but is also gaining new clients and expanding its market share. It means that evaluating companies with stable and high revenues will help to find growth stocks that may still have opportunities for further growth and high returns.

• Return on Equity (ROE): The ROE indicates the amount of profit earned with the shareholders’ funds that in a way shows company’s profitability. A high ROE has implications that the company is effectively utilizing the investors’ funds to expand the business. While looking for the growth stocks, investors should prefer companies having high current as well as an improving ROE. This metric is a good sign that the company is efficiently leveraging on its equity base to generate profit to fund its operations and new projects. High ROE growth stocks are those that are likely to be able to sustain competitive positions and deliver good earnings prospects.

• Earnings per Share (EPS) Growth: Earnings per share indicate the company’s profitability per share while EPS growth is the growth of the company’s profitability on a per share basis. Growth of EPS at an alarming rate indicates that the company is not only managing its operations efficiently but also is growing at a rapid pace in terms of profits. When considering the stocks that may have the potential to be classified as the growth stocks, the EPS growth rate must be considered because it reflects the ability of the business to turn its revenues into the actual profit. High EPS performers are usually retaining their earnings and reinvesting back in the company to drive more value to shareholders. Stocks with growth characteristics, especially those having a steady increase in EPS, are rather promising for long-term investment.

Examples of Blue Chip Growth Stocks:

Blue chip stocks are those shares of the companies that are financially secure and have a proven track record. Here are three examples of blue chip growth stocks from the US and the UK:

• Apple Inc. (AAPL): Apple has more unique products and becomes well-known for its powerful brand image. It also maintains healthy revenue and EPS growth, coupled by growing ecosystem comprising of devices and services. Apple is one of the most dominant growth oriented stocks, which has maintained its R&D spending to develop new products and technologies to fuel its growth.

• AstraZeneca PLC (AZN): AstraZeneca which is a British-Swedish pharmaceutical company has shown much improvement in its pipeline of novel therapeutic entities and a strategic focus on emerging economies. This factors has allowed the company to expand through focused investment on research and development so as to offer a comprehensive range of treatments. Due to its classification as a growth stock, AstraZeneca will continue to reap from enhanced biotechnology solutions and increased needs for health solutions worldwide.

• Amazon.com Inc. (AMZN): The commitment to customers and market diversification into sectors like cloud and entertainment have been key drivers to the meteoric rise of Amazon. Since the company’s revenues and market share are constantly rising, it makes it a perfect example of a blue chip growth stock. Its determination and ambition to expand the company’s international presence and enter new markets keep Amazon as one of the most promising representatives of the growth stocks, having vast potential to provide investors.

How to Determine the Growth Rate of a Stock:

The CAGR formula is commonly used by investors in order to assess the growth rate of a certain stock. CAGR is defined as the average annual compounded rate of return on investment for a given period that is more than one year. It eliminates the erratic movement in periodic returns and offers a more genuine picture of growth.

The formula for CAGR is:

CAGR: {(Ending Value/Beginning Value)1/n} – 1

Where:

• n is the number of years

• Beginning value is the initial value of the investment

• Ending value is the final value of the investment

Example Calculation: Apple Inc. (AAPL):

Using the CAGR formula, let’s calculate the compound annual growth rate of apple’s revenues over a five-year period. For instance, let the revenue at the beginning of the period (2018) be $ 265.6 billion, and the revenue at the end of the period (2023) be $ 394.3 billion.

CAGR: {(394.3/265.6)1/5} – 1

• First, 1.484 is the answer we get upon dividing ending value on beginning value.

• Next, raising this value to the power of 1/5, we got a figure of 1.082.

• After subtracting 1 from 1.082, we reached to a value of 0.082.

So, CAGR = 0.082*100% = 8.2%

Hence, the rate of revenue growth of Apple over the period of five years is around 8.2% per year.

Conclusion:

For this reason, growth stocks are popular among investors interested in reaping huge benefits based on the growth of a firm. According to revenue growth, the earnings per share growth, and return on equity, it is easy to find growth stocks. Growth stocks are high-growth companies, such as Apple, Amazon, and AstraZeneca that demonstrate a track record of competence. It is significant to comprehend and compute the growth rate of a stock using the CAGR equation for gaining sound knowledge about an investment’s future prospect.