| Investors want to know how to invest in growth | | | | over-priced. It could be a great investment at |
| stocks because this segment of the stock | | | | that price and move up to $50 or $100 within a |
| market offers great opportunities for big profits. | | | | couple of years. |
| Rapid price appreciation (rising stock price) is the | | | | If sales and earnings do not disappoint investors, |
| attraction here, not dividends. In a roaring bull | | | | JKL could still be attractive at $50 or $100. For |
| market growth stocks are commonly the center | | | | example, in a year and a half it could sell at $150 |
| of attention and the big winners. | | | | with earnings per share of $3 with a P-E of |
| In learning how to invest in this stock market | | | | 50X...still paying little if anything in dividends. |
| sector it is also important to understand the | | | | When you invest in growth stocks, you are |
| down-side risk involved. To my knowledge, no | | | | playing a momentum game. In other words, when |
| stock remains a high-powered growth stock | | | | the momentum in sales and earnings decline, |
| indefinitely. Sooner or later growth slows or | | | | expect a decline in the stock price as well. If you |
| problems develope. At such times investor losses | | | | hold a growth stock, pay attention to news about |
| can be disasterous. | | | | the company and the price of the stock. The |
| To make sure we're on the same page, I will | | | | decision as to when to sell can be a tough one, |
| profile a mythical growth stock, JKL. This is a | | | | and a very important one, because sooner or |
| relatively small but growing company, and a leader | | | | later dynamic growth stocks lose thier luster and |
| in a new technology that promises great | | | | fall from favor. |
| opportunity for investors. Sales have been | | | | Over time a successful company can mature, and |
| growing, and profits turned positive last year. | | | | growth slows. At such a point the stock dividend |
| Earning per share for the past four quarters (the | | | | may increase because the company no longer has |
| most recent last) were: $.10, $.20, $.30, $.40. Next | | | | growth opportunities worthy of plowing this |
| quarter earnings are estimated to come in at | | | | money back into to further growth. This is a sell |
| about $.55 per share, with $.85 likely the following | | | | signal if the stock is still selling at a high P-E. |
| quarter. | | | | Or problems can develope, either within the |
| JKL stock is selling at $30, up from $12 a year | | | | company or in the stock market. Any internal |
| earlier. It pays no dividends, and the P-E ratio is at | | | | corporate problem can send a growth stock into |
| about 30X earnings ($30 share price divided by | | | | a nose dive. After all, it was priced for perfection. |
| earnings per share of $1 for the past year). The | | | | Consider selling when bad news could result in |
| stock market (Dow Jones Industrial Average) is | | | | expectations of lower future profits. |
| selling at about 15 times earnings with a dividend | | | | Follow the price of your growth stock(s), and the |
| yield of about 2%. | | | | market in general. It's one thing if a stock like JKL |
| To learn how to invest in growth stocks, you | | | | declines when the stock market in general turns |
| should first learn how to know one when you see | | | | sour. It's quite another when your stock is |
| it. The figures from the last paragraph can be | | | | weaker than the market in general, especially if it |
| found for stocks listed in the newspaper, and in | | | | is falling worse than other growth stocks on a |
| the case of our mythical JKL mark it as a likely | | | | percentage basis. This is a sign of weakness, and |
| growth stock candidate. A little research on the | | | | often a good reason to sell. |
| internet should reveal the type of data shown in | | | | Do not just buy and hold growth stocks. They |
| the preceding paragraph. | | | | require a bit of attention, especially in a volatile |
| Good growth stocks do not sell cheap, unless you | | | | market. In learning how to invest here, remember |
| are lucky enough to find the likes of JKL before | | | | that high growth rates are temporary. When |
| the rest of the market jumps on it. That does | | | | growth declines the stock price usually follows. |
| not mean that JKL at $30 is expensive or | | | | |