How to Pick Large Cap Growth Stocks

Around 2003, value investors were lamenting that large cap, blue chip stocks such as Wal-Mart, Coca-Cola, and Home Depot, were extremely overvalued, while at the same time, momentum investors were buying shares like crazy. Today, large organizations are more profitable, pay larger dividends and engage in stock repurchase programs; however their common stocks have fallen in some cases more than sixty percent. So, on what grounds should investors pick large cap growth stocks?

Overvalued stocks may be corrected either through a decline of the share price or through the equity price standing still until the intrinsic value equals the market value. So, one way to pick large cap stocks is to consider that as more capital and cash flow builds up behind overvalued shares, value investors have the opportunity to buy giant US companies at prices that haven't been available ever before.

Growth investors invest in rapidly growing companies with considerable revenues and profits. The idea is to receive a high rate of return on investment from the increasing share price.

Normally, growth stocks generate substantially higher returns than other type of stocks, but, at the same time, the risk of investing in a growth stock is also higher compared to others.

Although, investing in growth stocks differs from industry to industry and firm to firm, there are common factors that investors focus on. These involve, but are not limited to:

• Historical and projected growth rate: large cap growth stocks are attractive when they expose a growth rate of 10%+ over the past five years. In regards to projected growth rate, large companies typically achieve a growth rate between 5% - 7%.

• Return on equity (ROE): large cap growth companies typically have a higher ROE than then industry average over a five-year period. This implies that these companies are profitable and produce earnings from the money shareholders have invested.

• Earnings per share (EPS): Pre-tax margins should top the past five-year average and the industry average. This means that the firm translates sales into earnings and controls its costs efficiently.

• Projected share price: based on the business models and market positioning of the company firm, analysts estimate the projected share price in five years. Projections should exceed the estimated industry average in order for the stocks to be attractive.

In conclusion, investing in large cap growth stocks implies investing in firms that expose above-average growth, but trade at expensive share prices. However, trading at a high price hoping for a high growth is risky because if the growth rate is below expectations, the high price will decline sharply.