The LML GROUP Hong Kong: Buying Stock in Growing Companies

The LML Group Hong Kong’s take on Buying Stock in Growing Companies. Thank you to Dave M. for this basic lesson.

Investing in growing companies offers the investor varies stages where profit can be realized and taken. When searching the markets for winners in the stock market an investor can enter and leave the investment at various stages. Long term value investing involves finding under-priced stocks with high intrinsic value. 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 under-priced, 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 looks for a margin of safety in a stock. These type investors look for the company that has large cash reserves, no appreciable debt, or property worth more than the value of the business. This margin of safety helps protect shareholders 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 investing in long term will often sell as the anticipated gain from investing in this growing company has been reached.

A brand new, rapidly growing company will have room to expend. 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. 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 show 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.