Why Don’t Growth Stocks Pan Out?
The early investors in growth stocks usually do quite well. They take the early risk when almost no one has heard of the company. As the company bangs out earnings surprise after earnings surprise it gains more investor attention and a much higher share price. However, at some point the company will be “priced for perfection . Meaning that the PE gets too inflated as people are so sure that the good times will just keep rolling (think of a mini version of the late 90s tech bubble). Unfortunately the exceptional growth rarely holds up over time. At some point, as the company tries to expand so rapidly, it will stumble. Even if that just means going from a 50% growth rate to a 40% growth rate. On the surface 40% still sounds great…but not to the investors who expected 50%+. So naturally the stock will tank. And tank fast. I’m sure you’ve had a few of these stocks in your portfolio over the years. So I don’t have to remind you how quickly the losses add up. That, in a nutshell, is the dan
