What are growth stocks?

A growth stock is a share in a company whose sales and earnings rise much faster than the economy and the average listed company, and are expected to keep doing so. There is no official cutoff: what matters is the pace of growth and how long it can last.

Growth companies usually put their profits back into the business, into new products, people, stores or research, because each reinvested dollar is expected to earn more than shareholders could earn elsewhere. So most pay little or no dividend, and any return comes from a rising share price.

In the drawing at the top, revenue and EPS rise every year and the share price follows, with dips along the way: price tracks earnings over time, not every year. The opposite style, buying cheap shares of slower companies, is compared in growth vs value stocks.

Growth stock
A share in a company whose revenue and earnings grow much faster than average. It usually trades at a higher P/E than the market.
Reinvestment
Spending profits on the business (products, people, expansion) instead of paying them out as dividends.

Where growth investing comes from: T. Rowe Price and Philip Fisher

Thomas Rowe Price Jr. (1898–1983), an American investment manager who started his own firm in 1937, is often called the father of growth investing. In a 1939 series in Barron’s, “Picking ‘Growth’ Stocks”, he described growth stocks as companies with favorable long-term growth in earnings that research suggests will continue.

Philip Fisher (1907–2004) gave the style its research habits in Common Stocks and Uncommon Profits (1958). His “scuttlebutt” method means learning about a company from the people around it: customers, suppliers, competitors and former employees. His 15-point checklist asks about sales potential, profit margins, research and the depth and honesty of management. He argued that a well-chosen company should be sold almost never.

These are published ideas, not proof that they work. Famous investors’ results are not typical, and growth picks go wrong often.

Growth investing metrics: revenue growth, EPS growth and margins

First check that the business is really growing. The list below defines the four core numbers with hypothetical Company A, the example used throughout this guide. Use reported figures for the fiscal year or the last 12 months, and compare each quarter with the same quarter a year earlier, since many businesses are seasonal.

Direction matters as much as size. In the drawing below, both companies still grow every quarter, but the one on the right is slowing, and a slowing trend is often what knocks down a high-priced stock.

The failure case: EPS can rise without a better business, through share buybacks, one-off gains or cost cuts that cannot repeat, and revenue can be bought with acquisitions or deep discounts. Look for revenue and earnings growing together, with margins steady or rising.

  • Revenue growth = (this year’s revenue − last year’s) ÷ last year’s. Company A: $500 million to $700 million = +40%.
  • EPS (earnings per share) = net income ÷ shares outstanding. Company A earned $70 million on 50 million shares: EPS of $1.40, up from $1.00, so EPS growth is +40%.
  • Gross margin = (revenue − cost of goods sold) ÷ revenue: what is left after making the product. Company A: ($700M − $280M) ÷ $700M = 60%.
  • Operating margin = operating income ÷ revenue: what is left after running the whole business. Company A: $98M ÷ $700M = 14%, up from 12% last year ($60M ÷ $500M).

Turn your phone sideways to read the drawing. Tap to close.

Two hand-drawn panels of quarterly EPS growth bars labeled Q1 to Q4: on the left, “accelerating” (+10%, +20%, +35%, +50%); on the right, “decelerating” (+50%, +35%, +20%, +10%).

How to value growth stocks: P/E, forward P/E, PEG and P/S

Growth is half the question; the other half is the price you pay for it. Company A trades at $56 a share, and the list below computes the four common ratios.

Peter Lynch popularized the PEG in One Up on Wall Street (1989), arguing that a fairly priced company’s P/E roughly equals its growth rate. In the drawing below, Company B looks cheaper on P/E but costs four times as much per point of growth.

PEG is a rough rule, not a verdict. On the slower 25% forecast, Company A’s PEG is 40 ÷ 25 = 1.6, and the ratio ignores debt, earnings quality and how long growth can last. Compare every ratio with the company’s own history and its peers, never alone.

  • P/E (price-to-earnings) = share price ÷ EPS over the last 12 months. Company A: $56 ÷ $1.40 = 40, so you pay $40 for each $1 of yearly profit.
  • Forward P/E = share price ÷ expected EPS for the next 12 months, usually an analysts’ estimate. If they expect $1.75 (+25%): $56 ÷ $1.75 = 32. Estimates are often wrong.
  • PEG = P/E ÷ annual EPS growth rate, with the percentage written as a whole number. Company A: 40 ÷ 40 = 1.0.
  • P/S (price-to-sales) = market value ÷ revenue over the last 12 months. Company A: 50 million shares × $56 = $2.8 billion, and $2.8 billion ÷ $700 million = 4.0. It works when profits are small or negative, but sales are not profits.

Turn your phone sideways to read the drawing. Tap to close.

Two hand-drawn company cards: “Company A: P/E 40, growth 40%” with an arrow to “PEG 1.0”, and “Company B: P/E 20, growth 5%” with an arrow to “PEG 4.0”, plus a note reading “PEG = P/E ÷ growth rate”.

Signs of a quality growth company

Fast growth for a year or two is common; quality is growth that can last. Each sign below has a failure version, and all of them can be present right before growth slows: they build a thesis, they do not prove it.

  • Durable demand: customers who come back for a product they need, not a fad. Failure: one hit product or one big customer.
  • A large market: sales still small next to the market the company could reach, so growth is not about to hit a ceiling. Failure: a niche that is nearly full.
  • Expanding margins: each extra dollar of sales costs less to deliver, like Company A’s operating margin rising from 12% to 14%. Failure: growth bought with discounts while margins shrink.
  • Growth paid for by the business itself. Failure: repeated share issues that dilute owners, or growth carried by debt.
  • Management that reinvests well and reports candidly. Fisher’s scuttlebutt test still applies: what do customers, suppliers and competitors say?

Growth stock risks: multiple compression, interest rates and slowing growth

The biggest risk is paying too much. Hypothetical: a company earns $1.00 a share and trades at a P/E of 60, so $60. Over four years EPS grows 20% a year, to about $2.07. If the market will then pay only 25 times earnings, the price is about $52: roughly 14% lower while profits more than doubled. That is multiple compression, shown in the drawing below.

Interest rates: much of a growth company’s value rests on profits expected years from now, and higher rates shrink what those distant profits are worth today. In 2022, as the Federal Reserve raised rates quickly, the tech-heavy Nasdaq Composite fell about 33% for the year.

Slowing growth hits twice: the earnings forecast and the multiple fall together. If Company A’s growth slows from 40% to 15% and the market now pays 25 times earnings instead of 40, the price drops from $56 to $35 (25 × $1.40), a 37.5% fall before profits shrink at all, often overnight after a weak report.

Turn your phone sideways to read the drawing. Tap to close.

Two hand-drawn lines over the same years: EPS rising steadily in green while the share price falls in red, with a “P/E 60” tag at the start, a “P/E 25” tag at the end, and a note reading “great company, too high a price”.

Drawdowns, position sizing and diversification

Growth stocks fall harder than the market in bad years. The Nasdaq Composite lost about 78% from its March 2000 high to its October 2002 low and did not close above that high again until 2015. Many single growth stocks fell further and never came back.

The drawing below shows why big losses are so hard to undo: a 10% fall needs an 11% gain to get back to the peak, a 25% fall needs 33%, and a 50% fall needs 100%. You cannot stop a stock from falling, but you can decide how much of your portfolio it takes with it.

Position sizing, hypothetical: in a $20,000 portfolio you decide that no single stock may cost you more than 2%, or $400. Your written exit is a 25% fall from your buy price or a broken thesis, whichever comes first. Maximum position = $400 ÷ 25% = $1,600, or 8% of the portfolio. If a bad report gaps the stock down 40%, past your exit, you lose $640 (3.2%): more than planned, still survivable. With all $20,000 in it, the same gap costs $8,000.

Diversification: spread positions across several companies in different industries, so one broken thesis is a setback, not a disaster. It does not protect you from a market-wide fall like 2022; for that, position size and a long time horizon matter more. See risk management and the position size calculator.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn equity curve that peaks, falls with the drawdown shaded, and recovers, plus three bars: −10% needs +11%, −25% needs +33% and −50% needs +100% to get back to the peak.

Growth investing vs trading growth stocks (CAN SLIM, VCP)

A growth investor owns the business for years, judges it on quarterly reports, accepts deep swings and sells when the thesis breaks.

A growth stock trader uses fundamentals as a filter and the chart for timing. William O’Neil’s CAN SLIM looks for strong quarterly and annual earnings growth, buys as the stock breaks out of a base and cuts any loss at 7–8% below the buy point. Mark Minervini’s volatility contraction pattern waits for pullbacks that shrink before a breakout. Their stops are much tighter than an investor’s.

Day traders work on a shorter clock still, where fundamentals barely move price from minute to minute. UpTickFlow, our invite-only TradingView indicator, is built for that clock on 5-minute to 1-hour charts: it waits for a closed candle at a level, draws an entry, a stop and a target, and stays quiet in chop. It does not screen fundamentals or pick stocks.

  • Time horizon: years for the investor, weeks to months for CAN SLIM or VCP traders, minutes to hours for day traders.
  • Entry: thesis and valuation, a breakout from a base, or a closed candle at an intraday level.
  • Exit: a broken thesis, a small fixed stop and sell rules, or the stop and target set before the trade.
  • The classic mistake is mixing them: a losing trade becomes an “investment” once its stop is skipped.

A growth investing checklist, and the failure case

Written down before you buy, these steps turn a story into a plan: a location (the price you pay), a size, an exit and a confirmation. For finding candidates, see how to pick growth stocks.

The failure case, hypothetical: Company A passes every step and you buy $1,600 worth at $56. Two quarters later revenue growth slows to 15% and the stock gaps to $35. Your thesis needed growth above 30%, so it is broken: you sell and lose $600, 3% of the portfolio, instead of hoping. Selling at a loss here is the plan working, not failing.

  1. Thesis: in one sentence, why demand for this company should keep growing for years.
  2. Growth: revenue and EPS both rising fast, with quarterly growth steady or accelerating.
  3. Quality: margins stable or expanding, little dilution, manageable debt.
  4. Price: P/E, forward P/E, PEG and P/S against the growth rate, history and peers. A great company at too high a price can still be a poor investment.
  5. Size and exit: the most this stock may cost the portfolio, and the written conditions that end the thesis.
  6. Confirmation: read each quarterly report against what you wrote, and act when the thesis starts to break.