Understanding Growth Stocks

Growth stocks are defined as shares projected to grow faster than the market average. Analysts at Bernstein provided a nuanced definition in a recent client note.

Key Characteristics of Growth Stocks

Growth stocks are said to generate higher and more stable revenue and are typically more profitable than average companies. According to Bernstein, recognition of these qualities often results in premium valuation ratios. Presently, growth stocks are priced at 1.4 times the market average.

Performance Comparison

Bernstein noted that growth stocks recently outperformed value stocks over several quarters, although this trend ended in the third quarter. Growth stocks are characterized as "high premium, high expectation stocks," meaning the risks for underperformance are significant. Maintaining high growth rates over extended periods becomes challenging as companies scale; only 6% of businesses with sales exceeding $25 billion have sustained 15%+ revenue growth for a decade.

Metrics for Identifying Growth Stocks

To identify growth stocks, Bernstein analysts consider seven factors:
1. Five-year sales growth relative to the market
2. Stability of sales growth
3. Reinvestment rate
4. Relative trailing P/E
5. Relative forward P/E
6. Relative price-to-book value
7. Relative price-to-sales

Sector Distribution

According to their analysis, 74% of growth stocks are in technology, consumer discretionary, healthcare, and industrial sectors. In terms of market capitalization, growth stock distribution is 41% technology, 13% consumer discretionary, and 11% communications services.

Regional Growth Potential

Emerging markets, particularly in Asia, demonstrate significantly higher long-term growth prospects compared to developed markets like the US. Historically, China and India have exhibited the highest growth rates at averaging 12% and 15%, respectively, although current growth has moderated.