As defined by Mr. Thomas Rowe Price, a pioneer of this approach in the late 1930s, growth stock investing focuses on well-managed companies whose earnings and dividends are expected to grow faster than both inflation and the overall economy. He saw the real test for a growth company as its ability to sustain earnings momentum even during economic slowdowns. Such companies, he predicted, would provide long-term growth of capital, preserving the investor's purchasing power against erosion from rising prices. Growth stock investors also look beyond earnings numbers to try and gauge whether a company can prudently sustain its rapid pace. Growth companies characteristically have healthy balance sheets, with equity levels at least twice debt.
Management is also a key concern.
Investors also need to place the company in a larger context. Pinpointing the source of earnings growth is a crucial and often revealing exercise. Finding Growth Stocks Growth stocks can be found virtually anywhere. Historically, the best growth companies, meaning the most consistent and most profitable, have tended to be in the consumer sector. Nevertheless, economic downturns and changing spending patterns take their toll on consumer-oriented companies from time to time, and the growth spotlight shifts to other areas of the economy.