Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “How to pick winning growth stocks”

Growth stocks are companies whose earnings growth has been above the market average, and is likely to remain above average. These firms often pay little or no dividends. Instead, they invest their cash flow in furthering their growth.

These stocks can be highly volatile, but they often make good long-term investments. They can be well-known stars or quiet gems, but they share the common trait of growing at a higher-than-average rate within their industry, or within the market as a whole, for many months or years.

Here are 2 keys to picking winning growth stocks—and avoiding the ones that can kill your profits:

1. Know the difference between momentum stocks and growth stocks: It’s all too easy to confuse growth stocks with momentum stocks. Like growth stocks, momentum stocks often move up faster than the market averages. But unlike growth-stock investors, momentum investors aim to profit from short-term trades. Momentum investors are particularly keen on the so-called “positive earnings surprise.” That’s when a company outdoes brokers’ earnings estimates.
   
   Momentum investors see a “negative earnings surprise” (or lower-than-expected earnings) as a sell signal. They use a number of formulas to make buy and sell decisions, but all come down to “buy on strength and sell on weakness.” So they tend to pile into the same stocks all at once, and the gains that follow are something of a self-fulfilling prophecy.
   
   The trouble is that when the stock’s rise falters, momentum investors also try to get out as a group, but there are never enough buyers. That leads to violent fluctuations in the stock’s price.

For a rising portfolio Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor. Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

2. Value stocks can lower your portfolio’s volatility: Most successful investors hold some growth stocks and some value stocks at any given time, depending on where they see the best opportunities.
   
   Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Many technology stocks, such as Intel, symbol INTC on Nasdaq (a stock we analyze in our Wall Street Stock Forecaster newsletter), started out as growth picks, but have started to transition into value stocks.
   
   Growth stocks and value stocks can make a winning combination. A growth stock can be a top performer when the company is growing. However, a single quarter of bad earnings can send it into a deep, but often temporary, slide. Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors discover their true value.

Our advice: If you invest as we advise—by spreading your investments out across the five main economic sectors, investing mainly in well-established companies and downplaying stocks that are in the broker/media limelight—you will automatically buy some growth stocks and some value stocks.

That helps you achieve good results while holding down volatility. But in the end, we think the relative amounts you invest in growth and value stocks should be secondary to your portfolio’s diversification and overall investment quality.

In the latest issue of Wall Street Stock Forecaster, we analyze 22 U.S. stocks that could provide steady gains in the critical years ahead. At the end of our analysis of each stock, we give you our clear advice of whether you should buy, hold—or sell.

Best of all, right now you can get this issue ABSOLUTELY FREE. Your 1-month free trial also includes 5 in-depth investment reports, our weekly Email/Telephone Hotline and much more. Don’t miss out. Click here to get started right away.

Next Wednesday, June 29, 2011, Investor Toolkit will look at how you can profit from our TSINetwork ratings.