Growth investing: focus on companies with high earnings growth

Growth investing is one of the two foundational equity-investing styles, alongside value. It prioritises companies whose earnings are growing rapidly—and whose valuations reflect that expected growth—over companies whose stocks are simply cheap relative to current fundamentals. The style has produced strong long-run returns in many samples, and equally striking underperformance in others.

What growth investing is

Growth investing is an equity strategy that selects stocks based on the company's earnings growth, sales growth, or other indicators of the underlying business's expansion rate. The implicit valuation model is that companies whose earnings are growing rapidly will continue to grow, and that the present value of the future earnings stream—even discounted at appropriate rates—justifies a premium relative to the current earnings figure.

The style contrasts with value investing, which favours companies that are cheap relative to current fundamentals (low price-to-earnings, low price-to-book, low price-to-cash-flow). Growth and value are not exclusive—a company can be both a growth company and reasonably valued, the GARP (growth at a reasonable price) niche—but the two styles' typical portfolios look very different.

Growth investing has been associated with several distinguished practitioners. Philip Fisher (Common Stocks and Uncommon Profits, 1958) is often cited as a foundational reference; Peter Lynch's tenure at Magellan in the 1980s is the canonical example of growth investing producing sustained outperformance at scale; Thomas Rowe Price's family of growth funds is one of the longest-running institutional implementations.

How it works

Growth investors typically screen for companies with earnings growth rates above a defined threshold (15–25% per year is a common target), revenue growth that supports the earnings story, expanding margins, and a competitive position that suggests the growth can persist. The screen is supplemented by qualitative analysis—management quality, addressable market size, technological or regulatory tailwinds—that quantitative screens cannot capture.

Position sizing in growth portfolios is often more concentrated than in broader market-cap-weighted portfolios. The implicit logic is that the few companies that compound earnings at high rates over multi-year periods produce most of the portfolio's return; over-diversification dilutes the effect. Many high-profile growth managers run portfolios of 30–50 names rather than the hundreds typical of broader equity strategies.

For systematic implementations, growth ETFs and factor strategies use defined growth metrics—typically a multi-factor combination of earnings growth, revenue growth, and earnings revisions—to weight the equity universe toward growth companies. The systematic implementations capture some of the style's premium without requiring the manager-skill component of discretionary growth funds.

What the evidence shows

Long-run growth-versus-value performance has been mixed. The Fama-French research (1993, 1998, and subsequent updates) documented that value outperformed growth on average from the 1920s through the 1990s, with the gap widest during the 1970s and tightest during the late 1990s. Subsequent samples have shown a different pattern: value's premium narrowed materially through the 2000s, and growth outperformed value over much of 2010–2020.

The 2010s growth-value gap is the most-discussed recent episode. The Russell 1000 Growth index outperformed the Russell 1000 Value index by approximately 5 percentage points per year over 2010–2020, driven primarily by the persistent outperformance of mega-cap technology stocks. The pattern reversed in 2022, with value outperforming growth by approximately 20 percentage points in the first half of the year as rising interest rates disproportionately hit growth-stock valuations.

The cycle-dependence of growth-versus-value performance is well-documented but the underlying drivers are still contested. Interest rate levels, the dominance of intangible-asset-heavy industries, and changes in accounting practices have all been proposed as explanations for the post-2010 pattern. The implication for forward-looking investors is that growth-versus-value performance over any given decade can differ substantially from the long-run average.

Limitations and trade-offs

Growth investing is exposed to valuation risk. A growth company whose growth rate disappoints—either through slowing growth or through a structural change in the addressable market—can see its stock fall by 50% or more even if the company remains profitable, simply because the multiple compresses. The growth investor's risk is concentrated on the persistence of the growth narrative, and that narrative can change quickly.

The style also has higher concentration risk than broader equity strategies. The few names that produce most of the returns in any given period are not the same names that will produce most of the returns in the next period; survivor bias in retrospective analysis makes growth investing look more reliable than it is in real time. The investor must hold a diversified portfolio of growth names and accept that most of the names will not be the standout performers.

Tax efficiency is an under-discussed weakness. High-turnover growth strategies generate short-term capital gains that, in jurisdictions with progressive capital-gains taxation, can erode after-tax returns materially. Lower-turnover growth strategies (Lynch-style buy-and-hold of compounders) avoid this but require the manager to identify the long-run winners ex ante—a high bar.

Growth investing in pfolio

pfolio's Assets page allows investors to filter the equity universe by style—growth versus value—and by other characteristics. Growth-oriented portfolios can be constructed from the filtered universe. The construction methodology is documented at how we build portfolios.

Related articles

• The value factor: why underpriced assets have historically outperformed
• The quality factor: how profitability and earnings stability drive long-run returns
• Growth vs dividend stocks: understanding the trade-offs for equity investors
• Factor investing explained: momentum, value, quality, and low volatility
• QARP: combining quality and value factors