Growth investors invest in the shares of enterprises with above-average profit growth. These companies are particularly successful in increasing their capital base and creating real values for their stockholders. Therefore, a growth strategy is particularly suitable for investors who are interested in the long-term capital growth of their assets.
There are three different approaches for identifying attractive growth shares:
1) Stable Growth:
This method of investment aims to select the shares of enterprises expected to show stable profit growth over a longer period. They achieve this because they enjoy an above-average market position and are relatively independent of the economic business cycle. A stable growth strategy is considered to be defensive, because it chiefly relies on established enterprises with a relatively low default risk.
This method involves capturing shares in a phase when an acceleration of the profit growth is expected. It aims to invest in enterprises during their strongest value generation phase because this is generally connected with the strongest increases of the share prices. However, this strategy is also associated with very high risks, because its success depends very substantially on whether the expectations of an enterprise are fulfilled or even are excelled. Momentum investing therefore is considered very aggressive and is only suitable for risk-conscious investors.
3) "Growth at a Reasonable Price" (GARP):
This strategy focuses on enterprises with an above-average profit growth and whose shares are not overvalued. However, in contrast to value investing, GARP is less concerned with finding undervalued titles, but aims to avoid overvaluations. Growth enterprises are identified that have only limited loss risks in the case of an earnings disappointment as well as a scope for significant share price increases following positive surprises in their business development.