Be careful if everyone is familiar with the company, knows about its success and assumes it will grow forever. Dell attracted an almost fanatical following of investors who believed that the company's direct-selling strategy would enable it to keep grabbing market share from competitors. But market share can't be increased indefinitely, and eventually Dell's sales growth failed to meet Wall Street's expectations. Even when an industry is booming, there's no guarantee that all companies in it will continue to prosper. Take IBM, which for decades led many major technological advances and was the must-own tech stock.
Some companies are able to show high earnings growth only because they borrow to finance expansion.
But eventually, they can't afford to borrow any more. Sustainable growth is best funded with the earnings that a company retains after it pays dividends. As a rule, a company needs an ROE above 15 percent to sustain a growth rate above 12 percent. The best growth companies have little or no debt. A stock that meets all these tests should be able to double in price over five years.