Which of the following is/are growth stocks?
I. The stock of Omega Corp., which is a highly successful firm that has had above average growth in sales and earnings in the past 5 years.
II. The stock of InstyPrints, a paper company which has been poorly managed in the past, causing the firm's stock price to plunge below what most analysts consider to be its fair value.
III. The stock of Zygotes, Etc., a biotech firm that has high business and financial risk.
Click on the arrows to vote for the correct answer
A. B. C. D. E. F.B
You have to be careful in distinguishing between a growth stock and a growth firm. A growth stock need not represent a growth firm. Rather, it is defined as a stock that has consistently generated returns higher than those justified by the risks. Such a situation arises either because the company has surprise windfalls or because at some point in the past, the market underestimated the firm's growth potential. Since InstyPrints has been identified and commonly tagged as being
"undervalued," one can reasonably expect
the stock to generate higher than required rates of return in the near future. (Again, keep in mind that the return on the stock is different from the return on the firm's investments in various projects). Therefore, InstyPrints' stock is a growth stock. On the other hand, Omega Corp. is a growth firm but its stock need not necessarily be a growth stock. Indeed, if Omega's stock is "overvalued," it may be a bad investment.