Problems of Investing in Growth Stocks

Abstract

FOR SECURITY ANALYSTS most interesting category of stocks may well be those called `growth stocks. Although their yield is low, one is justified in their purchase because of promise of future worth. The late Lord Keynes asserted that any investment should be regarded in terms of its probable yield, including principal appreciation, over its whole life, and not in terms of either its immediate yield or evaluation that market will attribute to it within three months or a year. A definition which can be helpful to development of decisions between what might be called the best stock and ordinary run of stocks is that companies whose shares make best stock investments possess elements of franchise or superiority to competition which permit them to obtain above-average profit margins for type of business done. Higher than average profit margins imply lower than average break-even points. This in turn means sustained profits and thus of dividends during bad times. It is continuity of dividends during periods of recession which provides acid test of investment quality.