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 ''
Investor's Business Daily''. In academic finance, the
Fama–French three-factor model relies on
book-to-market ratios (B/M ratios) to identify growth vs. value stocks. Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach. 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 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. ==See also==