How to find the best growth stocks?
In finance, a growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects. Classic examples of growth stocks include Facebook Inc. (FB), Amazon.com Inc. (AMZN), and Netflix Inc.
Growth stocks are suitable for investors who seek market-beating capital appreciation. They offer sizable share price gains, if you can stomach occasional volatility.
Investment in growth stocks can be risky
Since investors are paying a high price for a growth stock, based on expectation, if those expectations aren't realized growth stocks can see dramatic declines. Growth stocks tend to react faster to market swings, so you need to examine the risk of every investment you make. If you invest in a company that fails to expand, you could end up with less than you initially invested. A new company may be doing well right now, but will it be thriving in ten years? Nobody can know for sure and investing in early-stage companies is typically a risky move as they may not have any revenue for a number of years.
Back in the 1990s, many new internet-based companies were launched, and a plethora of investors thought they would become very profitable in the future and invested in them. Well, they were wrong. Many of these companies didn’t make it, and many disappeared, along with the investors’ money.
Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach. So, instead of putting all your money in early-stage companies, you could invest some in more established companies and consider other investments, such as bonds or property. This approach allows investors to potentially gain throughout economic cycles in which the general market situations favor either the growth or value investment style. For example, value stocks, often stocks of cyclical industries, tend to do well early in an economic recovery; growth stocks, on the other hand, tend to lead bull markets, which are normally fueled by falling interest rates and increased company earnings. Also, because the two groups of stocks tend not to move in the same direction or to the same extent, investors can enhance return potential and reduce risk by combining the two approaches.
What are growth vs value stocks?
Growth investors tend to look for companies that are seeing their sales and profits rise quickly. Value investors look for companies whose shares are inexpensive, whether relative to their peers or to their own past stock price.
Growth stocks aren’t for income investors; they rarely pay dividends. But they boast earnings and revenue potential that outstrip the average stock, with substantial cash flow as well. Often, the earnings growth rate can be dramatic, in the double-digit or even triple-digit figures. Competition can be fierce, though, and if rivals disrupt a growth stock's business, it can fall from favor quickly. Sometimes, even just a growth slowdown is enough to send prices sharply lower, as investors fear that long-term growth potential is waning.
Value stocks, on the other hand, are seen as being more conservative investments. They're often mature, well-known companies that have already grown into industry leaders and therefore don't have as much room left to expand further. Yet with reliable business models that have stood the test of time, they can be good choices for those seeking more price stability while still getting some of the positives of exposure to stocks.
Is Growth Investing Suitable for You?
Growth stocks are most suitable for investors that have a long-term time horizon. A person nearing or in retirement maybe would not fit the profile for an allocation that is heavily weighted in growth stocks due to both time and volatility. A younger investor with a longer time horizon and a higher tolerance for risk may be well-positioned to reap the benefits of a heavily weighted growth stock portfolio.
If you decide to go this route, make sure you consider your risk appetite. Would you define yourself as cautious or adventurous? How would you feel if your investments were to go down in value? And are you willing take a lot of risk it means there’s a chance for higher returns? There’s no right or wrong answer here, it all depends on your preferences, financial situation, and personal circumstances.
How to find the best growth stocks
As the name implies, growth stocks are companies that investors expect will grow much faster than others. These companies are relatively new, or in rapidly growing industries (such as technology). With growth investing, you’ll need to do some research to inform your investment decisions. To find potential winners, it’s important to spend some time researching companies and going through their results as well as balance sheets. And once you’ve selected your companies, you’ll need to monitor their activities and performance on a regular basis, so you can adjust your investment plan accordingly.
A stock should have a strong growth rate projected in the future, but keep its past in mind as well. Large companies often don't grow as fast as smaller ones, so be sure to keep their size, age, and performance in mind. So, you'd want to see past growth rates of 10% or higher in small companies for the past five years; look for rates of 5%–7% in larger firms. There are a few indicators you might see that signal a growth stock: Strong growth, Return on equity (ROE), Earnings per share (EPS), Earnings before taxes (EBT) and Projected stock prices.
One quick way to choosing growth tocks for your investment portfolio is to compare their price/earnings (P/E) ratios, often considered a measure of how over- or undervalued a company's stock is. Imagine a company with annual reported earnings of $1 per share. Now imagine another stock with reported annual earnings of $1 per share. This stock is trading at $40, so the P/E multiple is 40-times. The high price-to-earnings ratio suggests that investors expect future earnings to grow substantially. This is very likely an example of a growth stock.
One another way to find top growth stocks is to look for companies in high-growth industries that are poised to benefit from long-term trends. By focusing on growth industries such as e-commerce, cloud computing, and video gaming, and finding businesses that are leaders in their industries, it’s possible to identify stocks that have significant growth potential.
What are the best growth stocks to Buy Right Now?
In the present volatile stock market environment, it is sometimes difficult for investors to identify stocks with growth potential. The stocks on our list were picked based on their fundamentals and prospects for growth based on key business characteristics. We chose cheap stocks that have long-term growth prospects and high analyst ratings. Below are my picks for the best growth stocks of 2022.
Virgin Galactic Holdings, Inc. (NYSE: SPCE)
Virgin Galactic Holdings, Inc., an integrated aerospace company, develops human spaceflight for private individuals and researchers in the United States. It also manufactures air and space vehicles. The company's spaceship operations include commercial human spaceflight, flying commercial research, and development payloads into space. In addition, it engages in the design and development, manufacturing, ground and flight testing, and post-flight maintenance of spaceflight vehicles. The company was founded in 2017 is headquartered in Las Cruces, New Mexico.
Novavax, Inc. (NASDAQ: NVAX)
Novavax (NASDAQ: NVAX) is a drug company trying to develop nanoparticle vaccines and adjuvants. The firm has a market cap of close to $14 billion and annual revenue near $500 million. Novavax is especially known for using a recombinant vaccine technology to develop new products. The firm is seeking a cure for COVID-19, Ebola, seasonal influenza and many other infectious diseases.
Intellia Therapeutics Inc. (NASDAQ: NTLA)
Intellia Therapeutics Inc. (formerly known as AZRN Inc.) was founded in 2014 and is headquartered in Cambridge, Massachusetts. The company is currently focused on gene editing and the development of therapeutics based on a unique biological tool called CRISPR/Cas9 system. Company products are meant to help patients suffering from various medical conditions Including: cancer, genetic disorders, viral infections, inflammatory disorders and more.
Shopify (NYSE: SHOP)
Shopify Inc. , a commerce company, provides a commerce platform and services in Canada, the United States, the United Kingdom, Australia, Latin America, and internationally. The company is building a global commerce operating system along with a growing set of tools and capabilities that enable merchants of all sizes to sell to anyone, anywhere. With that, its proprietary e-commerce platform is crafted for simplicity and scalability. It also utilizes machine learning and has accumulated tens of billions of interactions in over 10 years to leverage on.
Square (NYSE: SQ)
Square is a company that specializes in digital payments. The company allows its Sellers to use its platform to reach buyers online and in-person, manage their businesses, and access financing. Square is no stranger to frequently launching new services and upgrading its business to keep up with the times.
PayPal (NASDAQ: PYPL)
PayPal Holdings, Inc. operates as a technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Its payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, Hyperwallet, and iZettle products.
Facebook (NASDAQ: FB)
Facebook is not just a social media company that connects more than 3 billion of its users around the world. But the bigger story here is that it has helped more than 200 million businesses connect to their prospective customers. Even with the high market capitalization, the fundamentals alone should make a pretty convincing case for Facebook stock. In fact, it is easy to forget that FB stock has risen by over 40% just this year alone.
Final thought
Growth takes time and if you want to see results, you’ll need to be patient – after all, Amazon didn’t become successful overnight, it took years. Same with Apple and Facebook! So as a growth investor, you may want to think long-term and give your investment enough time to potentially flourish and mature. In fact, the longer you remain invested, the more likely you are to see positive returns. For instance, people, who stayed invested in the FTSE 100 for any 10-year period between 1984 and 2020, have had an 89% chance of making a gain.
