Stock Market Tips 7

Is it a growth company?

Growth companies provide excellent investment opportunities. As a company grows and expands, so will its profits. This means not only liberal and frequent bonus issues in the future but also continuously rising dividends. This is the main reason why growth companies are eagerly sought after by investors. In fact, it would not be much of an exaggeration to suggest that the search for, and identification of, growth companies dominates all investment activity.

How does one identify a growth company? One of the simplest ways of doing so is to look at the company's record of performance. Companies that have a proven record of growth in the past are the ones which are most likely to grow in the future. This is not always true but it does explain to a great extent the consistency with which most growth companies tend to maintain their pace of growth while others don't. The fact that a company has an excellent record of growth implies that it has a dynamic, growth oriented management. Management policies don't change overnight. A management that is growth oriented is likely to continue to remain so in the future also.

Growth companies will generally be found in growing industries, and growing sectors or areas of the economy. Only very rarely will you find a growth company in a stagnant or declining sector of the economy. Even if you do, the growth prospects of such a company are bound to be short lived and limited. Therefore, if you want to locate growth companies you must first identify the growth areas of the economy. Once you do this, it will not be difficult to identify companies that will probably step in and take advantage of these.

One way to recognize a growth situation is to foresee the future demand for any product or product group. How this is done can best be illustrated by taking a real life situation.

For example, everybody is aware of the growing need for quality healthcare. Increase in longevity of life, entry of private sector health insurance companies, virtual breakdown of healthcare services in USA and Europe, paucity of corporate hospitals has created ideal conditions for the rapid growth of the healthcare sector. In fact, healthcare is the fastest growing sector worldwide with an estimated annual growth rate of around 24 per cent. The implementation of the WTO accord after 31 December 2004 opens up rapid growth opportunities in pharmaceuticals, textiles, farm produce and IT services.

Another growth area is commodities. Commodities, like aluminum, steel, copper, have just emerged from a 30 year bear market. Burgeoning demand from China and high GDP growth rates in Asia, particularly India, have opened up attractive growth opportunities in commodities.

Then, too, every day we read in newspapers about the growing rate of urbanization and the rapidly increasing number of working couples in urban areas. These two broad trends present a growth situation. If these trends continue, you can foresee the future implications. Let us try to see what these could possibly be. Working couples mean a change in consumer and food habits. When the husband and wife come home in the evening after a long and tiring day at work, they won't have the time, energy, or inclination to do time consuming and strenuous domestic chores.

The answer to their problems lies in easy to cook, processed or semi processed foods, a switch from cotton fabrics to easy to maintain clothes made from synthetic materials, easily available home entertainment, time and energy saving gadgets like pressure cookers, washing machines, refrigerators, etc. Moreover, the availability of two incomes in the family instead of one income, means that the couple will have the necessary purchasing power for switching over to a new lifestyle. This is a growth situation for companies producing refrigerators, pressure cookers, home appliances, processed foods, television sets, videos and personal care items. A working wife will also insist on spending a part of her own income on toiletries, cosmetics and personal care products.

Growth doesn't come by accident companies have to plan for growth. They have to identify growth products and areas and prepare detailed plans for implementation of expansion cum diversification projects. They have to make arrangements for the financing of these projects, buy land, sign foreign collaboration agreements for import of technical know how and equipment, and obtain clearances from concerned government agencies. All these activities get a lot of press coverage and publicity. If you are alert and make it a point to read financial newspaper carefully, it should not be difficult to get information on companies that are gearing up for future growth.

If you invest in the stocks of a company that is about to embark upon a major growth phase then you can make a fair amount of money by the time this growth phase reaches its peak. A basic point that you should keep in mind is that the future of your investment in any company is directly linked with the performance of that company. If the company grows, so we at whom your investment grows may outstrip the company's ill your investment in fact, sometimes the rate growth rate. This usually happens when investors in their enthusiasm over a company's growth prospects push up its stock prices to unjustifiably high levels, thus offering opportunities to smart investors to sell their stocks at a handsome profit.