Introduction To Stock Charts

In the investing community, never has there been a term more misunderstood than growth stock. To many, a growth stock simply means a name stock or a stock with a lot of demand registered on the stock charts. To others, it is just one of the stocks selling at high earnings multiples.

Being "name" or popular is not necessarily synonymous with true growth. More often than not it is a stock which has already seen its growth. You are not likely to make money with a stock which has already made a lot for others.

Whenever speculative fever runs high, investors tend to overreach for popular stocks on the stock charts. One widely held misconception, especially in periods of market excesses, is that growth stocks constitute a sort of different species and are, therefore, somewhat above reasonable price-earnings ratios, which are generally accepted as the basic criteria for stock prices.

That, of course, is absurd. Whether it's growth or nongrowth, the all-important price-earnings ratio should always be the predominant determinant of stock prices. Even allowing for its admittedly greater growth potential, a growth stock should still be evaluated primarily on the same basis of earnings or at least earnings potential. No stock, growth or nongrowth, is above earnings. A few exceptional stocks do merit a high price despite their lack of current earnings. Inexperienced investors, however, would do well to stay away from such issues or situations.

No place else could neophytes get hurt so easily as in the stock market looking at stock charts. In their reach for a fast buck, many have come to discard the first investment safeguards and, in the words of Keith Funston, president of the New York Stock Exchange, were "feverishly substituting rumor, hearsay and a desire to get rich quick for sound investment judgment."

This danger is real when people put money into stocks before trying to find out the first thing about the underlying companies. Nobody in the market for a house would buy a home without first checking it out. It seems a little odd for usually cost-conscious Americans to buy several thousand dollars worth of stock without even taking a look at the company's record.

The growth stock concept is well entrenched, with the great majority of investors long having recognized growth stocks as a major type of investment opportunity. Everybody loves a true growth stock. Other things being equal, a growth stock is definitely preferred to a nongrowth stock. Generally, you are expected to pay some premium for a growth stock. The important think is not to overpay for it. Also, you should subject a growth stock to the same rigid standards of scrutiny as you would any other stock you buy.

Nothing but the most exceptional cases should induce you to buy into companies without a solid record of growth on the stock charts. Avoid companies which are largely based on expectations or "projected" growth. Even a good record of growth in the past is not necessarily necessarily indicative of its future trend.

Still, basic data is important. Perhaps the single most revealing and surest yardstick of industry or corporate growth is profit margin. A widening profit margin always means better cost control, lower production costs and other management features which are classic characteristics of a growth company.

This and other "fundamentals" about a company or industry are what make a situation basically attractive. Beginners would do well to get involved only with situations sound in "fundamentals," though a brilliantly timed purchase of even a basically unattractive stock might work out well.

The market is always in the habit of overbuying stocks of favored groups or overselling shares of "deflated" industries. It pays not to overreach for or chase after any stock. There is nothing permanent in the growth of any industry group. Just as yesterday's glamour stocks have become today's wallflowers, so today's favorites could be tomorrow's laggards. The glamour of uraniums, airlines, oils, etc., came and went. We have just witnessed the rise and fall, temporarily at least, of electronics, bowl-ing and boating" No one knows how long the market's current favorites such as toys, department stores, banks, insurance com-panies, and savings and loan associations will _be able to occupy the center of the market spotlight.

Market leaders keep changing hands, with the "Street" turning to one group after another in a pendulum fashion. Style or vogue in investment can change rapidly. Growth can go as easily as it comes. Only constant alertness to the changing fortunes in industrial groups and individual corporations will enable you to reap the benefits while avoiding the pitfalls.

One comparatively sure thing in the characteristically unsure stock market is that you can't go too wrong in putting money into companies geared to consumers' spending patterns in line with the major shifts in the nation's unusually rapidly growing population. This, combined with almost revolutionary upward movements in the real purchasing power of millions of families, is fast changing the character of our living standards.

Companies which know how to upgrade consumers' desires and spending concepts are likely to be among the first to find new ways to make money. Once in a great while, you may come across a few companies which can compare with the General Motors or Eastman Kodak of the past—if you know how to recognize them. They are the ones which will create more wealth than income.

As a corollary to its outstanding profit potential, growth stock investment entails above-average risk. Of thousands of companies aspiring to be an "IBM," there is still only one IBM. For every "Polaroid" which succeeds there must be hundreds of aspiring "Polaroids" which fail.

It is only prudent for yon not fn pay ton high a premium for any stock on the stock charts, especially one which has gone up sharply recently. I  would rather miss a boat than overstretch myself for it. For if you miss one boat there will always be the next one to catch. If, however, you overstretch yourself, you could get hurt.

I would rather get into situations quietly improving but not yet reflected in market re-evaluation. Sometimes there is a considerable time lag between, which creates growth opportunities for alert investors.

There is no such thing as an absolutely had stork nr at absolutely good stock. What .actually counts is the price. No stock is too good for any price; nor is a stock (except for the frauds) too bad for any price. At a certain price level, even a normally unattractive stock could become attractive. Or vice versa, a normally attractive stock would become unattractive if excessively priced.

This book covers both the fundamentals of growth stocks and the specific techniques used by professionals in picking them. It proposes to let you in on things which professionals look for in growth securities, and the how's and why's of looking for them. This is primarily a method book, not a textbook about the static phase of the growth stock market. It is a working guide for making the most out of growth situations. It is growth stock analysis made simple for you.

It should be emphasized that the stocks mentioned in this book were chosen from stock charts only to demonstrate a given point or points. They should be useful only in the sense that they provide a profit pattern for your analysis or evaluation. In no case should they be construed as tips or recommendations because of the speed of change in corporate fortunes and in the stock market.

LIN TSO, Security Analyst with The New England Industries, Inc.

New York City, 1962

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