Backing a growth strategy

Critical to achieving your wealth objectives is the selection of an effective investment style

Critical to achieving your wealth objectives is the selection of an effective investment style. In this regard, the discerning stock picker often faces a choice between two schools of thought, namely "value" and "growth" investing.

Generally considered opposing strategies, each holds appeal for different audiences and different times within the economic cycle. This week we will focus on the merits of a growth strategy. So how can a Sharetrack investor identify a typical growth stock? Classic growth companies usually demonstrate a record of consistently rising profits.

The trick for you is to identify how historical profit growth is derived and to understand the factors which should ensure its continuance. For example, rapid growth may be a function of a company's success in taking a tried and tested strategy in one geographical location and applying this approach elsewhere, as successfully pioneered by Heineken.

Growth status may also be derived from developing a strong brand name and excellent products, which create a dominant market position, clearly demonstrated by Coca-Cola. Alternatively, the company may establish itself as the technological standard in a sector which itself is in relative infancy, such as EMC in data storage.

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While such companies have delivered above average growth, the competitive reality is that this does not happen with the unfailing, year-by-year consistency that the stock market desires. High market expectations means failure to produce anticipated earnings growth can generate severe disappointment. This was evidenced by the exaggerated decline in the Walt Disney share price following the loss of earnings momentum, after excellent performance in 1997.

Furthermore, as growth stocks are typically priced as a function of future earnings, any changes in discount rates, especially in a low inflationary environment, may significantly impact on share prices. Although the theoretical premise of finding the next Microsoft holds great appeal, in reality the challenge for you in finding such companies is far from easy, as for every winner there are countless losers. The share prices of growth stocks are by their nature volatile. However, this volatility if traded successfully, may lead to a winning strategy for Sharetrack participants. Some potential growth gems with recent corrections - Glaxo, EMC, Dell, Pfizer, BSkyB . . . ?

Mark Donnelly is portfolio manager in the private client department of Goodbody Stockbrokers.