Fundamental Growth

Abstract

Conventional growth indices suffer from two important shortcomings. First, stocks that are anti-value (very expensive) are not necessarily growth stocks. The decision to include a stock in a growth index should be based on fundamental growth measures, such as growth in sales, profits, or R&D spending, rather than price-based measures. Second, when these indices are weighted by objective measures of growth, rather than by market value, performance markedly improves. Overpaying for growth is unhelpful. We also assert that some stocks with poor growth prospects and unattractive valuations may have no place in either value or growth indices.