The fact that a stock is considered to be growth stock is no assurance against a decline in income or market value during the downtrend of a business cycle, as growth stocks often depreciate as much as other groups.
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Sometimes a company which has a relatively low profit margin is able greatly to increase its sales volume without increasing its capital investment and thereby increase its earnings per share.
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Detecting with a high degree of accuracy when the long-term earnings growth of a company has ceased is difficult because no mathematical formula can be applied to determine when the change from growth to maturity or decadence occurs.
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When picking a list of growth stocks for long-term investment, broad diversification of the risk is the first and most important principle to follow. No one can look ahead five or ten years and say what is the most promising industry or the best stock to own.
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Investors should seek a company that can lower the cost of production and develop an expanding market without materially reducing the return on capital invested in the business.
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Growth stocks are as varied in their characteristics as a surgeon’s instruments or a carpenter’s tools and, similarly, successful results are dependent on knowledge and experience in their proper use.
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While the trend in profit margins is one of the most important factors to consider, it is not always the company which reports the higher profit margin that proves to be the better growth stock.
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No mathematical formula or yardstick alone can be relied on for identifying growth stocks or for detecting when their earnings reach maturity.
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The two best ways of measuring the life cycle of an industry are unit volume of sales and net earnings available for stockholders.
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“Growth stocks” can be defined as shares in business enterprises which have demonstrated favorable underlying long-term growth in earnings and which, after careful research study, give indications of continued secular growth in the future.
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There are two sound reasons for investing in common stocks — growth of income and growth of principal.
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In planning an investment program, it is extremely important that the investor, before purchasing any securities, should ask himself, “What is my objective?”
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The three main objectives of investors are: (1) Capital conservation, or stability of market value of invested principal; (2) Liberal income at a fixed rate; and (3) Capital growth.
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Earnings of most corporations pass through a life cycle which, like the human cycle, has three important phases — growth, maturity, and decadence.
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Once a business is well established, the greatest opportunity for gain is afforded during the period of growth in earning power. The risk factor increases when maturity is reached and decadence begins.
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