Page 182 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 9: Fundamental Analysis 3: Company Analysis

(iii) Assign P/E to the stock based on its growth rate and market payback period. Notes
(iv) Make adjustments for dividend pay out ratio and earnings volatility.
(v) Find volume of stock by multiplying normal earnings with the determined P/E.

Self Assessment

Fill in the blanks:
8. .................................... in P/Es between stocks were due to projected earnings growth, expected
dividend payout, and variation in rate of earnings growth or growth risk.
9. .................................... carried out a survey of practitioners’ stocks evaluation methods and
found that several approaches were in vogue.

9.4 Growth Stocks

Investors are interested in not only current dividends but also in future earnings through
dividends and capital gains.
Characteristics of growth stocks: The following features help identify growth stocks:
(i) Substantial and steady growth in EPS
(ii) Low current DPS, because retained earnings are high and reinvested.

(iii) High returns on book value
(iv) Emphasis on R & D
(v) Diversification plans for strategic competitive advantage
(vi) Marketing competence and edge.

Benefits: Investment in growth stocks would benefit investors in many ways:
1. The market value goes up at a rate much faster than the rate of inflation.
2. Higher capital gains.
3. Long range tension free holding without any need for sell & buy operations and associated
problems.
Valuation: The investor interested in growth shares can either employ (1) Comparative P/E
ratios approach or (2) Dividend Discount model for valuation of the stocks.
9.4.1 Guidelines for Investment

The following guidelines will be helpful to investors interested in growth stocks:
1. Tuning is not very important, but with appropriate timing one may be able to pick up
shares at the threshold of high growth rate.
2. Choice of stock should not be based on simple factor. Multiple criteria using different
appraisal techniques may be employed.

3. It is better to diversify investment in growth stocks industry-wise. Because different
industries grow at different by evening out differences.
4. One should hold the stock for more than five years to gain advantage.

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