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||02-28-2011 01:04 AM
Growth Stocks & Business life cycles
Growth stocks are as those that create annual earning and sales at a faster pace than average businesses.
Now with that in mind, when investing in growth stocks, you have to take into consideration at what stage a business is, within it's life cycle.
A business goes through four separate stages in it's growth.
The first is the Early Development Stage. This is when a company's revenue accelerate and it begins to make a profit.
The second stage is the Rapid Expansion Stage. During this stage, a company will experience rapid growth as it expands outward and capitalizes on the demand of it's customer base. Revenues will grow and profits margins will widen.
The third stage is the Mature Growth Stage. This is a period when the company reaches the peak of it's ability to produce and the market's ability to consume. At this stage, revenues and earnings slow.
The last stage is the Stabilization Decline Stage. This is a period when, either due to a waning interest in the service or product or an increase in competition, revenues will drop. Along with the drop in revenues, profit margins and earnings will decline.
If you invest too early in a growth stock, the company will not have been tested and could have the potential to flame out for many reasons. Lack of capital, poor management, interest in the product or service cease to exist or any other of a multitude of reasons.
If you invest too late in a company's life cycle, it may be close to reaching it's mature growth state, when revenues begin to decline.
Benjamin Graham's view on when to purchase stock in such a company came down to two points. Either purchase it when the stock price has lowered, due to a market correction, that tends to occur during a bear market, or purchase the stock when it is trading below it's intrinsic value.
This intrinsic value is based on the company's assets, it's earnings and dividends and future prospects.
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