Growth stocks can provide market-beating returns for investors if you pick the right companies early in their lifecycles. But spotting the next Amazon or Netflix before the rest of the market does can be tricky.
In this guide, we’ll explain what these kinds of stocks are and how to find growth stocks so you can invest successfully.
What is a Growth Stock?
A growth stock is any stock that’s expected to deliver above-average revenue growth, earnings growth, or stock price appreciation. There’s no single factor that makes a stock a growth stock, and expectation plays just as much of a role as reality in labeling growth stocks.
Typically, growth stocks represent young companies that are quickly gaining customers and have a lot of plans for expansion. However, blue-chip stocks can also be considered growth stocks in cases when a company is moving into new business lines.
Growth stock companies don’t necessarily need to turn a profit, and many don’t because they invest all their earnings back into the company to fuel future growth. The promise of growth stocks for investors is that a company will have greater earnings in the future because of the investments it makes now.
Growth Investing vs. Value Investing
On the opposite end of the spectrum from growth stocks are value stocks. Value stocks are shares of companies that grow more slowly than the market average, but which have demonstrated the ability to consistently turn out profits. Many blue-chip and dividend-paying stocks are considered value stocks.
Growth stock investing and value stock investing represent two very different styles of investing. Growth investing tends to involve more volatility since rapid growth can be unpredictable and investors can be easily spooked if a company fails to deliver on aggressive targets. Value investing tends to yield steady, but relatively lower returns. Using both growth and value investing approaches together can lead to a more balanced portfolio.
How to Find Growth Stocks
It’s relatively easy to find just any growth stock – you need only look to the tech sector. But to find the right growth stocks at the right time, you need a strategy. Below are the key steps you can take to identify growth stocks that are ripe for investment.
Define Your Niche
Within the wide world of growth stocks, it helps to narrow your focus to a specific niche. Usually, that means zooming in on topics you’re interested in and knowledgeable about. If you have a background in biology, for instance, you might want to focus on biotech growth stocks. If you have a background in business, you might look at companies that offer services for businesses.
Having a niche gives you an advantage over the rest of the market because you know your niche better than most other investors do. So, when a growth-oriented company makes claims about what it can do or what its potential market is, you can evaluate that information with a critical eye.
Pay Attention to Trends
Another way to find potentially high-growth stocks is to think about trends that are taking form in the market right now. At the broadest level, you could look at which market sectors are growing and why. At a more granular level, you can think about how specific new technology or social developments will create opportunities for individual companies or sub-sectors.
Choose Your Growth Metrics
Since growth can be defined in a lot of different ways, it’s useful to have a set of growth metrics in mind that you want to focus on. You could look at revenue, gross profit, or earnings per share growth over time, as well as at share price appreciation. Alternatively, it might make more sense to focus on company-specific metrics like subscriber growth, active monthly users, or revenue per customer.
Importantly, there are a lot of different ways to slice and dice these metrics. You can compare them against the whole market, the relevant industry, or only a company’s direct competitors. You can also look at growth on a quarterly or annual basis. Analyzing growth metrics from multiple angles can be helpful, but ultimately, you’ll need to decide what metrics and analyses matter most to you.
Dive into Research
Metrics and statistics can be useful for evaluating companies, but they don’t always tell companies’ full stories. It’s up to you to do some manual research to figure out which companies are worth investing in.
A great place to start is by reading a company’s prospectus. Even if it’s a few years old, this document often lays out a company’s vision for growth and offers a baseline for whether it’s hitting its original targets. You can also comb through earnings reports and call transcripts to see how a company’s growth targets and achievements have changed over time.
It’s also important to gather as much information as you can about a company. Read through news articles and analyst commentaries, and if possible, talk to customers to see what they think about a company’s product.
Use a Stock Scanner
A stock scanner offers a simple, fast way to find growth stocks that fall into your niche and meet specific thresholds for the growth metrics you’re interested in. Scanners are especially useful for identifying growth stocks that are worth researching in more depth.
One tool you can use is Stock Rover. It allows you to scan for growth stocks and then start to dig into your results. Stock Rover offers charts for key metrics like earnings growth over time and makes it easy to compare growth stocks from within the same industry.
Get Growth Stock Picks from the Pros
You can also use professional help to find growth stock picks. Stock newsletters like Stock Advisor and Rule Breakers from The Motley Fool are laser-focused on growth stocks and deliver two new growth stocks picks each month. The analysts behind these newsletters have impressive track records – Stock Advisor has outpaced the S&P 500 by a factor of seven since it launched in 2003 – so their picks are worth your attention. Additionally, they are currently running a promotion where new members of Stock Advisor can get a special discount.
Claim Your New Member Discount at The Motley FoolConclusion: How to Find Growth Stocks
Growth stocks are attractive to investors because they offer a chance at outsized returns and the potential to become the next Amazon. However, investing in the right growth stock at the right time requires strategy and effort. With these tips, you can find growth stocks that are poised to take off.
