Financial Education

Growth investors are typically willing to pay higher valuations (P/E ratios) for stocks that have high earnings growth, in the expectation that the growth will allow the earnings to “catch up” to the valuation. However, if growth does not materialize the valuation typically declines as well, resulting in more substantial losses.

Growth investors may seek consistent growth or earnings momentum. Consistent growers have a long history of sales growth, high profitability and predictable earnings. Stocks have earnings momentum when the year/year increase is very large and, preferably, the growth rate itself is increasing. Earnings for such companies are usually less predictable, and the growth rate itself is less sustainable. As a result, such strategies tend to have relatively short holding periods.
Source: Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

For more information, see all articles on: Asset Allocation, FInancial Planning, Investing in Stocks, Investment Returns, Portfolio Management, Ratio Analysis, Valuation

See also:

Equity Investment Styles

Types of Benchmarks

The Growth Duration Model

The Gordon Growth Model

The H-Model Dividend Discount Model