High Earnings Growth for defensive grade

Hi Serenity,

Can high earnings growth be a problem for defensive grade?

Thanks,
Filipe

Stocks Discussed: 
Bellway PLC (BWY.L)

Submitted by pipo2152. Created on Wednesday 25th May 2022. Updated on Wednesday 25th May 2022.

Submitted by GrahamValue on Wednesday 25th May 2022

Dear pipo2152,

Thank you for your forum post!

Like anything that seems too good to be true, a very high Earning Growth rate may warrant deeper investigation.

But Graham only seems to have set a lower limit for Earning Growth, not an upper limit.

Thank you again for your forum post!

Submitted by pipo2152 on Thursday 26th May 2022

Dier Graham

Thanks you for your reply!

High growth, higher volatility. When growth becomes less, greater is the fall.
However, for value investing we shouldn't give too much importance if the seventeen qualitative and quantitative specifications are clean.

Thank you again for your reply the post!

Submitted by GrahamValue on Thursday 26th May 2022

Dear pipo2152,

Thank you for your comment!

You're correct. Graham only sets a minimum requirement for Earning Growth. Graham did not advocate paying more for a higher than usual Growth Rate. The Intrinsic Value of the stock is therefore decided by its Assets and Earnings, not its Growth Rate.

Also, do note that if the Growth Rate reduces, Assets and Earnings and do not reduce. Only their Growth Rate reduces. So again, the Intrinsic Value does not get affected; unless the Growth Rate falls below the minimum threshold.

Lastly, from a Value Investing point of view, do note that more volatile stocks can be less risky.

Thank you again for your comment!