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More to the Story

There are three potential dangers in growth investing strategies. The first is that finding companies whose growth in earnings will be high in future periods may be difficult to do. Neither past growth nor analyst estimates of growth seem to be reliable forecasters of expected growth in earnings. The second problem relates to a point made at the beginning of the chapter: Growth can destroy value if it is generated by investment in projects with low returns. Third, you often find that high growth companies are also exposed to high risk; the benefits of growth may very well be wiped out by the presence of high risk.

Identifying Growth Companies

You generally look at past growth in earnings or analyst estimates of growth in earnings in the future when you are trying to identify companies that will have high growth in earnings in the future. Unfortunately, both measures have their limitations when it comes to this task.


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