Growth Stocks

Growth stocks are issued by companies that have high rates of steady growth in sales and earnings. These companies generally have a high price-earnings (P/E) ratios and do not pay dividends.

Companies such as Home Depot (ticker symbol HD) and Intel (ticker symbol INTC) grew as high double-digit rates during the 1990s. These companies growth was reduced soon after for different reasons. Home Depot confronts a growing competence from Lowes part which was much newer, smaller, and with more manageable stores.

Intel had great falls in its sales due to a reduction in capital equipment spending by business and in the dwarfing in computer spare part sales to consumers. Nevertheless, Intel could keep its gross profit margins above 50% in the majority of trimesters during the first years of the 2000 decade.

An indication that these two companies have already gone through sustained periods of high growth is that they no longer retain all its earnings. Both pay small amounts as dividends over their profits. Besides, both from their leading position in their corresponding industries, also could be catalogued as blue-chip companies. Most growth companies pay no dividends such as Cisco Systems (CSCO) which saw annual sales in the 30 to 50% range during the 1990s technology boom. Cisco?s stock price soared around 130,000% from its IPO in February 1990 to March 2000. Cisco expects growth to continue in the high single digits to low teens fro revenue and earnings over the next five years. Rather than pay out their earnings in dividends, growth companies retain their earnings and reinvest them in the expansion of their businesses.

Lowes, eBay and Starbucks are some other examples of growth companies. Growth stocks are often referred to as high-P/E-ratio stocks because their greater growth prospectus make investors more willing to buy them at higher prices. Investors do not receive returns in the form of dividends, so they buy these stocks for their potential capital appreciation.