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In finance, a growth stock is a share capital of a company that generates substantial and sustainable positive cash flow and whose 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 , as the companies typically reinvest most retained earnings in capital-intensive projects.
The definition of a "growth stock" differs among some well-known investors. For example, Warren Buffett does not differentiate between value and growth investing. In his 1992 letter to shareholders, he stated that many analysts consider growth and value investing to be opposites which he characterized "fuzzy thinking." Furthermore, Buffett cautions investors against overpaying for growth stocks, noting that growth projections are often overly optimistic. Instead, he prioritizes companies with a durable competitive advantage and a high return on capital, rather than focusing solely on revenue or earnings growth.
Peter Lynch classifies stocks into four categories: "Slow Growers," "Stalwarts," "Fast Growers," and "Turnarounds." He is known for focusing on what he calls "Fast Growers" referring to companies that grow at rates of 20% or higher. However, like Buffett, Lynch also believes in not overpaying for stocks emphasizing that investors should use their "edge" to find companies with high earnings potential that are not yet overvalued. He recommends investing in companies with P/E ratios equal to or lower than their growth rates and suggests holding these investments for three to five years. He is often credited for popularizing the PEG ratio to analyze growth stocks.
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