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Investors in Stock Market Seek Assurances of Future Growth

What Are the Prospects for a Company's Future

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Investors in the stock market are concerned about one thing: growth.

Regardless of your investing style, growth is how wealth is generated.

Whether you are a value investor, a growth investor or a hybrid investor, you only realize increased wealth when growth occurs in the company.

Value investors count on the stock they bought at a bargain basement price rising as the market discovers the true worth of the company. They are willing to wait some time for their profits, however the profits will only come when the price of the stock is bid up by the market.

Growth Investors

Growth investors focus on immediate to short-term growth in the stock's price. They may bail if growth slows or fails to meet expectations. Others may hang on if they see the company maturing and generating enough free cash to begin paying dividends.

In the end, a company must grow earnings (or begin seeing the potential for positive earnings in the case of young, high-growth companies). It is usually not enough simply to grow revenue, although this is almost always the predecessor to growing earning.

If the company can't turn revenue into earnings (or reinvesting for higher growth rates), it may not have much future.

It may seem natural to assume that increased revenue will lead to higher earnings, but that is not always the case. Increasing revenues often comes with a cost and if the cost is too high, earnings may be elusive.

High-growth companies often push every dollar back into the company to fund more growth. This may pay off if this increased growth leads to higher stock prices. It is also a slippery slope, because one misstep in hitting growth targets may mean bad news for the stock price when investors sell to retain profits or to avoid possible losses.

Tomorrow

As an investor in stocks, you should always be asking what the company will do for me tomorrow.

By that, I mean investors are particularly concerned with future growth in earnings and, ultimately, the stock's price and dividend if it pays one.

A company can have a great year and the stock can reflect that performance, but if there is no brighter tomorrow, how is future stock price growth going to be justified?

This concern with short-term growth is often criticized as a problem that penalizes companies that make decisions good for the long term, but detrimental in the near term to earnings.

Stock is Hammered

That's not always the case if management is trusted by investors to make good decisions, however in many cases a company's stock is hammered in the market if there is not a clear pattern of year-to-year or even quarter-to-quarter growth.

This is especially true of companies tagged as growth investments and in sectors such as technology that are marked by high growth rates.

While this may seem unfair to some, it is a perfectly logical way for the market to allocate investment assets to those stocks that will produce the highest returns in the near future.

Stocks for Long Term

Individual investors are rightly cautioned to invest for the long term and many successful investors do just that, however they only do so when they find a company that has a good chance of providing a sustained growth over a long period.

Investing in company for the long term that does not grow is a pointless exercise (unless you are investing in a utility, for example, for a nice fat dividend and don't care much about the share price).

The message is stock investors should always looking forward and should not be concerned with past performance other than in providing a reference point.

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