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How to Spot a Great Growth Stock

Growth isn't just about the tech sector.

Mike Trigg, 02/07/2006

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Some people think a growth company is any business with earnings growth of at least 15%; others argue that it's a company growing faster than its industry. It seems some folks even equate growth stocks just with the technology industry.

At Morningstar, our definition is simple: It's any business with wonderful investment opportunities--opportunities for investing capital at high rates of return.

Although many investors obsess over revenue and earnings growth, those numbers may not tell the full story. In fact, companies often destroy value by trying to grow too fast or in unprofitable ways. We want to own businesses investing capital right now to create wealth in the future. As shareholders, you own the company, so this future wealth should be reflected in the value of your shares.

When looking for growth ideas, we focus on three factors:

Strong Unit Growth

The best growth companies have strong unit sales growth.

Coca-Cola KO and Starbucks SBUX, two of the greatest growth companies of all time, have created significant amounts of value over the years by simply selling more soda and coffee. While margin expansion and price increases are legitimate forms of growth, we prefer plain old unit growth. A company that sells more of what it makes--year in and year out--is far more dependable.

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