Portfolio Management Pathway · Active Equity Investing: Strategies

Growth Investing Strategies for CFA Level III

Updated 8 October 2026 · Fact-checked

Growth investing buys companies whose earnings or revenues are expected to grow faster than the market. Main styles are GARP (growth at a reasonable price), momentum, and stable versus cyclical growth. To answer exam questions, identify the style from the evidence, then link it to its main risk: overpaying or a reversal.

Understand Growth Investing Strategies

Growth investing targets companies expected to grow earnings, revenues or cash flows faster than the market or their industry. Growth managers accept high multiples (P/E, P/B, EV/sales) because they believe future growth will justify today's price. Value investors do the opposite: they look for low multiples and expect the price to rise toward intrinsic value.

There are several growth styles. Stable growth companies grow steadily through the economic cycle, such as firms with recurring revenue or strong brands. Their earnings are more predictable, so investors pay a premium. Cyclical growth companies grow quickly when the economy is strong, but earnings fall in weak periods. Timing the cycle matters more here.

GARP (growth at a reasonable price) is a blend of growth and value. The manager wants above-average growth but refuses to pay any price for it. Typical tools are the PEG ratio (P/E ÷ expected earnings growth rate) and screens that combine growth with moderate valuation. GARP portfolios usually sit between pure growth and pure value in style.

Momentum investing buys stocks with strong recent price or earnings trends and expects the trend to continue. It relies on price momentum (past returns), earnings momentum (positive surprises, upward estimate revisions) or both. It is not based on intrinsic value, so it can work even when valuations look stretched. Its risk is sharp reversals when the trend breaks, and high turnover and trading costs.

The central risk of growth investing is paying too much. If growth disappoints, the multiple falls and earnings fall together, so the loss is double. Growth stocks are also sensitive to higher discount rates because more of their value lies far in the future. Growth can also fade as competition arrives, so you must judge how long above-average growth can last.

Key rules to remember

PEG ratio: PEG = (P/E) ÷ expected annual earnings growth rate (in % points); Lower PEG suggests cheaper growth. Used in GARP. Compare with peers, and check that the growth forecast is reliable.
Growth style rule: Growth = high expected growth, high multiples; Value = low multiples, price below intrinsic value; Use to classify a manager from the facts given in the vignette.
Double hit of overpaying: Price change ≈ (change in earnings) combined with (change in P/E multiple); If growth disappoints, both fall, so losses can be larger than the earnings miss alone.

How to solve Growth Investing Strategies questions

Use this method for any growth investing item set or essay question.

1Read the command word (identify, determine, justify, discuss) and note how many responses are required.
2Find the evidence in the vignette: growth rates, multiples, price trends, earnings revisions, sensitivity to the economy.
3Classify the style: stable growth, cyclical growth, GARP or momentum.
4Do any calculation asked for (for example PEG) and show it, ending with a clear number.
5Link the style to its main risk: overpaying, growth fading, cycle turning, or momentum reversal.
6Tie the conclusion to the client or mandate, such as benchmark, risk budget or turnover tolerance.
7Answer in a short, direct sentence per point. Give only the number of responses requested.

Quickest way: Style then risk in two lines

When to use it: Use when time is short, especially for multiple-choice items in an item set.

Spot the clue word: steady and predictable = stable growth; economy-sensitive = cyclical; price trend or estimate revisions = momentum; growth plus a valuation limit = GARP.
Pick the matching risk: overpaying for stable, cycle timing for cyclical, reversal and turnover for momentum, wrong growth forecast for GARP.
Eliminate options that describe value investing or a different style.

Common mistakes in Growth Investing Strategies

Treating GARP as the same as value investing.
Both care about price, so they sound alike.
Fix: GARP still requires above-average growth. Value does not. GARP limits what you pay for growth.
Saying momentum investing relies on intrinsic value.
Students assume all active styles estimate fundamental value.
Fix: Momentum follows price or earnings trends. It does not need a valuation view.
Assuming stable growth means low risk.
Predictable earnings feel safe.
Fix: Stable growers often trade at high multiples, so the risk of overpaying is high if growth slows.
Calling cyclical growth the same as stable growth.
Both show high growth in good years.
Fix: Cyclical growth earnings swing with the economy. Stable growth holds up through the cycle.
Ignoring the multiple when growth disappoints.
Focus is only on earnings.
Fix: Mention that the P/E can fall as well, which amplifies the loss.
Giving more responses than the question asks for.
Fear of missing points.
Fix: Only the requested number, in the order given, is evaluated. Give exactly that number.

Worked examples

Example 1

Stock A has a P/E of 30 and expected earnings growth of 20% a year. Stock B has a P/E of 24 and expected growth of 12%. Using PEG, which is cheaper for a GARP manager, and what is one risk of the choice?

Show the solution

PEG for A = 30 ÷ 20 = 1.5.
PEG for B = 24 ÷ 12 = 2.0.
Lower PEG means cheaper growth, so A is cheaper.
Risk: the PEG depends on the growth forecast. If A's growth falls short, its PEG rises and its P/E may also fall.

Answer: Stock A is cheaper for a GARP manager (PEG 1.5 versus 2.0). The main risk is that the growth forecast proves too optimistic.

Example 2

A manager buys stocks with strong 12-month price gains and upward analyst estimate revisions, regardless of valuation. Identify the style and state one main risk.

Show the solution

The buying rule uses price trends and earnings estimate revisions.
Valuation is ignored, so this is not value or GARP.
This is momentum investing, using price and earnings momentum.
Main risk: trends can reverse sharply, and high turnover raises trading costs.

Answer: Momentum investing. A key risk is a sudden trend reversal, with turnover costs also reducing returns.

Exam tips

Match the style to the clue words in the vignette before reading the answer choices.
For GARP calculations, show PEG as P/E divided by growth in percentage points, then state which is lower.
When asked to justify, give the evidence, then the style, then the risk in one or two short sentences.
Remember the double hit: falling earnings plus a falling multiple.
Tie the style to the client's risk budget and turnover tolerance when the vignette mentions them.

Growth Investing Strategies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Growth Investing Strategies: frequently asked questions

What is the difference between value and growth investing?

Value investors buy stocks priced below estimated intrinsic value, often with low multiples. Growth investors buy companies with above-average expected growth and accept higher multiples. Both are active styles but they look for different sources of return.

What is GARP investing?

GARP means growth at a reasonable price. The manager seeks above-average growth but limits the valuation paid, often using the PEG ratio or combined growth and valuation screens. It sits between growth and value.

How does GARP differ from momentum investing?

GARP is a fundamental approach that weighs growth against price paid. Momentum follows recent price or earnings trends and does not need a view on intrinsic value. Momentum usually has higher turnover.

What is the biggest risk in growth investing?

Paying too much. If growth falls short, earnings and the valuation multiple can both drop, causing large losses. Growth stocks are also sensitive to higher discount rates.