#AskGradMoney: Is a Stock's Growth More Important Than Quality?
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DAn, Los Angeles:
"I'm taking a look at stocks for the first time and I noticed that the stocks in the Dow Jones don't necessarily grow all that fast. However I see some lesser-known stocks that are growing like crazy. So quality really matter if all I'm looking for is growth?"
It seems natural to throw money behind stocks that are improving their sales the fastest, or at least on the surface appear to be doing so. This question needs to be answered with another question, "how long are you planning to hold these stocks?" I always want to encourage quality (i.e. strong earnings, low P/E ratios, high trading volumes, etc.) because it's easily measured and it's less likely to let you down over the long run. However, short term bursts in lesser known companies are very difficult to time.
I like to invest in high-quality, safe stocks (like components of the Dow) at good prices, and I'll consider the lower-quality stocks at weak prices. You never want to invest in low-quality stocks on the upswing - everyone is doing it and that bubble will burst at any time. However, if these stocks pulled back on non-detrimental news like they are changing their CEO or weather issues impacted their earnings, then I might consider buying shares.
Aside from simple valuation, cheap stocks really do make you feel a bit cheap. For example, safe stocks to me, like FedEx and Walt Disney don't feel cheap. However, lower-quality stocks like Denny's and Spirit Airlines definitely feel cheap. It helps to get that sense whenever you're considering a stock; you should never buy a shares of a company that you do not fully understand what they do and are going to do.
The market is a tide that lifts all boats, and if you plan to hold onto these lower-quality stocks for a long time, maybe you'll luck out and they'll get acquired or merge. But in the short term, unless you know what you are doing, I wouldn't compromise quality for growth.