| | | | Why Your "Growth" Stock Is Boring You to Tears
Author: Corey Snyder, Publisher
"If I travel all the way out there and I find that you've been lying to me, I'm going to find you and I'm going to take more than my money back. Is that alright with you? "
- Daniel Plainview, There Will Be Blood (2007)
There's no true entry in Merriam-Webster's Dictionary for "growth stock," although they at least hit us with this:
"Stock issued by a growth company."
Very nice…
But to give you a more descriptive definition, here's what the folks at CFI (Corporate Finance Institute) have to say about it:
"Growth stocks are stocks that come with a substantially higher growth rate compared to the mean growth rate prevailing in the market. It means that the stock grows at a faster rate than the average stock in the market, consequently generating earnings at a faster rate" (emphasis mine).
Now we're getting somewhere…
The reason for the emphasis is that while it may sound simple, the rate mentioned is what some growth investors forget to watch as a company progresses.
Of course, growth stocks are by default more speculative - you're paying more up front for what you believe will hand over a gigantic return at a later date based on the company's potential…
And though the gains in your position make a stock appear worthy of holding, there eventually comes a time when those percentages begin trailing off.
And that's when certain fundamentals are due for a review...
Risk/Return
Finding growth companies isn't necessarily that difficult.
I mentioned last week that positive trends in sales, revenue, and margins are a solid start. But aside from seeing the upward trend, it's good to break the numbers down further once you've yanked one out of the water...
As a growth-heavy investment makes its run, it reaches a point where those incredible upticks in the fundamentals show a more normal distribution relative to its industry peers.
And by then, the potential for price appreciation of the company's stock has likely begun waning...
In other words, it's a little more than just the percentage gain staring at you from your brokerage's website — at least, when talking about a growth investment — and then wondering why the first 100% came so easily…
I was talking with a good friend of mine about the subject earlier today:
"Why do they peter out?"
"They peter out because they have nowhere to reinvest capital… So there comes a point where you simply cut it and look for the next."
And we both referred to the one metric that should be kept in check - ROE (return on equity).
Yes, P/E, book value, and all the rest are important. But when you're comparing the numbers year over year or quarter over quarter, management's ability to put capital to work is what invariably tells us whether or not growth at a high rate is still in the cards...
And other metrics may present in a way that give the impression that all things are on the up and up… until they don't.
But ROE will at least give us a starting point and show whether or not the company is profiting at a rate above the rest of the industry...
Now, I understand that using this metric can put investors in a position where there's more trading frequency and therefore, more taxation...
There's no arguing that.
The drop-off happens much sooner than we think...
But what I also understand is that most investors don't care as much about the taxes when their returns are higher than if they continue holding well after the stock loses its mojo...
And putting your capital to work in a place where it gains quickly is typically the end goal.
Of course, the stock could even continue climbing higher…
But when the speed of its ascent begins to slow, I want to see the ROE first.
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| | | | | | | One thing new traders fail to understand is that education doesn't stop once you've nailed a strategy. It's the opposite.
Options Coach Chris Hood and Brian Jones talk about Chris's strategy in detail... and why he doesn't stop learning.
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| | | FINAL PRINTS: The Major Indices Wrap-Up |
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| Index
S&P 500
Dow Jones
NASDAQ
Russell 2000
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| Weekly +/-
+26.06
-86.71
+234.02
+14.90 |
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| % Change
+0.58%
-0.24%
+1.55%
+0.65% |
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| Close
4,535.43
35,369.09
15,363.52
2,303.75
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| % YTD
+20.75%
+15.56%
+19.21%
+16.06%
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| | | MARKET WHISPERS: The Weekend Scoop
- Meme Coin for a Cause - The adoption of Bitcoin by El Salvador could give the cryptocurrency a boost as traders on social media are banding together to help President Nayib Bukele's endeavor. Taking a page out of the WallStreetBets playbook, traders across Twitter (TWTR) and Reddit are vowing to buy $30 worth of the digital asset on September 7th to celebrate the first day of making Bitcoin an acceptable currency. Great time to sell and buy back.
- JPMorgan and the Wall of Worry - Investment banking giant JPMorgan Chase (JPM) is still holding onto its bullish outlook on equities climbing the "wall of worry" despite the fall season being right around the corner. Although "investor sentiment is much more subdued currently than it was at the start of the year," the bank's strategists "don't expect a policy mistake" and believe that the Fed's remarks about inflation being transitory will hold true... Shoot us an email if you think we should start a Rogue Investing betting pool.
- Social Security Not So Secure - With the last year and a half being chock-full of major events, Social Security has been pushed aside... until now. New data from Social Security's annual report revealed that the numbers are getting worse. Last year, the report stated that the fund that supplies benefits could be depleted by 2034, but the latest figures now estimate this could happen by 2033. However, this doesn't mean Social Security is broke. It just means that it will eventually be broke.
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| | | | | Did you miss Options Coach Chris Hood's landmark event? Chris does a deep dive into his cornerstone strategy that has been paying him every week for years...
Click below to watch now.
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| | | HIT OR MISS: Who's on Deck for Earnings
- Monday, September 6th - Market closed
- Tuesday, September 7th - Coupa Software Inc. (COUP), Centogene (CNTG)
- Wednesday, September 8th - GameStop Corp. (GME), Restoration Hardware (RH), Lululemon Athletica Inc. (LULU), REV Group Inc. (REVG), CooTek Inc. (CTK), Waterdrop Inc. (WDH), Affimed (AFMD)
- Thursday, September 9th - Dave & Buster's Entertainment (PLAY), Zscaler Inc. (ZS), Fuelcell Energy Inc. (FCEL), Academy Sports and Outdoors (ASO), Lovesac Company (LOVE)
- Friday, September 10th - Kroger Companies (KR)
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| | | Enjoying Dawn Report? Learn something, made some money?SHARE YOUR STORY WITH US OR TELL US HOW TO SERVE YOU BETTER.Let us know at info@rogueinvesting.com |
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| | | | | | | | | | Copyright © 2020 Rogue Investing. All Rights Reserved. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. Rogue Investing.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for any trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. By downloading this book your information may be shared with our educational partners. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of Rogue Investing.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. An InvestPub Company. |
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| HIGH RISK WARNING Trading foreign exchange, stocks, options, or futures on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade, you should carefully consider your objectives, financial situation, needs and level of experience. RogueInvesting.com provides general advice that does not take into account your objectives, financial situation or needs. The content of this website must not be construed as personal advice. The possibility exists that you could sustain a loss in excess of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin.You should seek advice from an independent financial advisor. Past performance is not necessarily indicative of future success. |
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