In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects.
Analysts compute Return on equity (ROE) by dividing a company's net income into average common equity. To be classified as a growth stock, analysts generally expect companies to achieve a 15 percent or higher return on equity. CAN SLIM is a method which identifies growth stocks and was created by William O'Neil a stock broker and publisher of Investors Business Daily.
Since 1982, the growth stocks have beaten value stocks during:
During the rest of the years, the value stocks have done better. Note that the 5 years preceding the dot-com bubble burst, growth stocks did better than value, since then value stocks have generally done better.
Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.