Growth Stock: To Buy or Not?

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In my last article, I’ve shared how you can find growth stocks in just 5 simple steps. Now, let’s look at 4 tools that evaluate the investment potential of a growth stock.

By Ian Tai

SCGM is used as a case study and its summarised financial results are as followed:

Based on Table 1, SCGM is a growth stock as it has:

  1. Growth in sales & profits
  2. Positive Cash flows from operations
  3. Increasing Return on Equity (ROE)
  4. Tangible plans to further expand its business operations

So, is SCGM a good investment? This is the next question I’ll be answering. Personally, I believe a good investment is a stock that is:

  1. Fundamentally solid (we’ve covered that.)
  2. Trading at its Lowest Possible Price

As I write (March 6, 2017), SCGM is trading at RM3.61 a share. Is this a good price to buy shares of SCGM?

Here, I would share 4 simple tools to assess whether SCGM is undervalued or overvalued. They include:

*EPS = Annual Earnings / No. of Shares Issued

At current price of RM 3.61, SCGM’s P/E Ratio works out to be 26.0, which is the highest recorded since 2013.

This means, you are willing to pay 26.0 times of its annual earnings if you choose to buy SCGM’s shares at RM3.61 a share.

 

 

 

#4: SMA-Crossover Method

This method is useful to identify the mid-to-long term price trend of a stock, especially for mid-to-long term investors who intend to grow wealth through ownership of fundamentally solid stocks. It’s less useful to traders who are short-term in nature (see Figure 2).

For a start, there are 3 types of price trends – uptrend, downtrend and sideway.

Ideally, we want to buy stocks when it is at the beginning stage of an uptrend. We would consider selling if it is at the ending stage of an uptrend.

Source: Bursamarketplace.com

Here are several quick observations:

  1. The Black Line has been moving above the Green Line.
  2. All 3 lines: Blue, Black and Green lines are moving upwards.
  3. The 2 observations signify that SCGM is moving on an uptrend.
  4. The stock price is currently trading at its highest at the moment.
  5. Thus, the uptrend is definitely not at its beginning stage. Instead, it is at its mid-to-end stage.

So, is SCGM a good stock to buy?

I’ll leave the final decision to you. After all, different investors have different needs and thus, would make investment decisions differently.

 

 

About the author: Ian Tai is the founder of Bursaking.com.my

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