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Investing in Growing Companies

Investing in growing companies offers the investor varied stages where profit can be realized and taken. When picking new winners in the stock market an investor can enter and leave the investment at various stages. Long term value investing involves finding underpriced stocks with high intrinsic value. Although such a stock will likely rise in value over the years, its price appreciation may well come in fits and starts. Much of the profit from such an investment may be taken after a price jump. For example, when the broader market catches on to the fact that a stock has been underpriced, the stock will be bid up and the short and medium term investors will often take their profit at that point.

A long term investor will often look for a margin of safety in a stock. Whether the company has large cash reserves, no appreciable debt, or property worth more than the value of the business, this margin of safety protects the stock holder over the long term against loss. However, when the broader market catches on and bids up the stock price this margin of safety moves from the balance sheet to the stock ticker. At this point even those engaged solely in long term stock investing will often sell as all anticipated gain from investing in growing companies has been reached.

A brand new, rapidly growing company will have room to expand. Whether it is a growing motel chain or popular new restaurant the company will have room to expand and several years to do so. Investing in growing companies early will allow the investor the opportunity to sell at a profit as the company matures and saturates its market. Many fast growing companies turn into dividend stocks as they have lots of cash flow and little room to expand. Such a stock may look attractive to the very conservative investor but will have exhausted the bulk of its profit potential by this time.

Where the maturing growth company may still have hidden value is as a takeover target. Other, larger companies in the same industry may choose to grow by acquisition rather than growing more business internally. They may choose to buy the competition before the competition becomes too strong and drives them out of business. Having a sense of when a company may be a takeover target and who the buyer might be will give the investor a heads up as to what to expect, how high a buyout price could go, and how much profit might be realized in the process. Fundamental analysis will tell the investor how much a stock “should” be worth based upon the company’s ability to make money. However, in the event of a takeover bid the investor will want to know just how badly the buyer wants the company in question and just how hard current management will fight to protect the company from takeover. Not uncommonly, stocks are bid up well over reasonable prices in takeover bids. This is another point at which the investor may well wish to take their profits and look elsewhere for investing in growing companies.

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