Growth, for its own sake, has tripped up many companies -- and investors, for that matter.
Every year around this time, financial publications publish their list of America's fastest-growing companies. And their advertising departments love them. These are often the most popular issues
of the year, as consumers try to find "the next Microsoft (Nasdaq: MSFT)
" or "the next Google (Nasdaq: GOOG)
Yet here's what these publications won't tell you as they're trying to drum up the media buzz: The fastest-growing companies are not often the best investments. In the pursuit of rapid growth, these companies resort to actions that are against the interest of shareholders.
Rapid growth isn't always a sure signal of a company's health. We've compiled a list of three types of high-growth companies you should avoid.
1. The Money-Raisers
Growth-oriented companies and Wall Street bankers are often locked in an unsavory dance. The bankers offer the promise of fresh cash to help these companies rapidly expand -- but with a catch that most investors overlook. Not only must these companies issue fresh stock to the bankers' clients in exchange for the money, which results in a dilution in the investment stake of existing shareholders, but these bankers also help themselves to another pair of investment perks that can dilute investors -- options and warrants.
David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com