Elnora H. and William B. Quarton Professor of Business Administration and Economics, Coe College, Iowa
Growth Stock Entry Timing, 3/31/2024
There are three general entry points for growth stocks. For stocks like Costco, the rise is steady, and the growth rate is predictable. Investors are better off adopting a dollar-cost averaging method, buying regularly with a fixed dollar amount. When there are unreasonable corrections, such as the one in 2023, investors should buy more when possible.
The second entry point is at the inflection point. Nvidia was a growth stock even before the AI take-off. Investors, of course, can build up Nvidia stock the way they do with Costco shares, but Nvidia has a unique take-off point. Doubling down at the inflection point is extremely beneficial. Investors can draw the time series plot by superimposing the revenue and share price series to see the inflection point.
The third entry point is when a growth stock suffers a major correction. Take the performance of Shopify as an example. In late 2021, Shopify experienced a collapse-like correction. This happened because its share price had outgrown its revenue by a significant margin. The drop was severe and an overreaction. Now the divergence happens in the opposite direction and thus provides the investor with a great opportunity. Once the share price stabilizes, investors can start to build up a position. As long as Shopify remains a growth stock, its share price is bound to pick up the pace and catch up with its revenue.
Growth stock investors can benefit from learning trend following for these reasons.
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