Growth Investing- Purchasing stock in companies that are generating higher profits and revenue than other businesses in the same industry or market as a whole is known as growth investing. Value investing, or purchasing shares at a discount to what an investor believes to be their inherent value, is not the same as growth investment.
A PR disaster or unfavorable industry conditions can be two reasons why a company is undervalued. This happened in 2015 when E. coli sickened customers at many Chipotle restaurants, causing the fast-food chain’s stock to plummet by 21.4%.
Key Principles of Growth Investing
The following are the main tenets of growth investing:
- Market trends: at the moment, cloud computing, artificial intelligence, and electric cars are all quite popular.
- Businesses with a competitive edge, such as Tesla’s battery technology or the fulfillment and delivery networks of the massive online retailer Amazon.
- Businesses whose markets are able to expand; for instance, there is a larger market for longer-range electric vehicles than for vehicles with lower ranges.
Strategies for Growth Investing
The best strategies for growth investing have been shown to be:
- Watching market cycles: growth stocks have led the pack at times, but value stocks have been the front-runners at other times. Low interest rates allow corporations to take on debt, which helps them fund their activities, which is why growth stocks typically do better during these times. Due to astronomically high valuations and the Federal Reserve’s first of eight interest rate rises on March 16, 2022, growth stocks saw a sell-off in the first half of 2023.
- Recognising businesses that provide cutting-edge goods or services, or developing industries like technology and healthcare.
- Locating new patents: Businesses that possess patents for innovative technologies have a competitive edge over other businesses in their industry.
- Determining which businesses are gaining market share: businesses that expand into already-existing markets, like Nvidia in the graphics card industry, or businesses that start new industries or markets, like Coinbase and Airbnb.
- Keeping up with financial news: Every day, new businesses are formed or established ones start to trade openly.
- Monitoring growth rates: Growth firms show growth rates of at least 15% annually, which translates into a five-year double in the value of their shares.
- Watching for high volatility – growth stocks tend to see larger price swings than other stocks in their industry; they also don’t usually pay dividends, preferring to reinvest their profits in further growth.
- Investing in exchange-traded funds (ETFs) or growth mutual funds, which are covered in more detail below.
How to Invest in Growth Stocks
You must evaluate a company’s financials, performance indicators, and growth potential in order to find growth stocks. You will need to conduct what is referred to as quantitative research in order to achieve that.
1. Examine the 10-K and 10-Q reports that a business must file with the SEC, as these are mandatory for all businesses. The company’s balance sheet and third-party-audited financial data are included in the Form 10-K, which is reported yearly. A company’s current financial and operational snapshot is provided by the Form 10-Q, which is filed on a quarterly basis. Visit the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) website to locate these reports.
2. Go to the investor relations website of the company. There should be a link to the Annual Report there.
3. Browse the detailed pages of firms on any of the free financial websites, such as Seeking Alpha, Yahoo Finance, CNBC, Google Finance, and MSN Money.
4. Pay close attention to the crucial data, particularly the price-to-earnings (PE), price-per-share (EPS), and price-to-sales (P/S) ratios. Lower price-to-sales ratios are more desirable. The price-to-sales ratio is computed by dividing a company’s market capitalization, which is the number of outstanding shares multiplied by the share price, by the total sales or revenue for the previous 12 months. TTM stands for “trailing twelve months,” which means that the number represents the company’s performance over the previous year.
The price-per-earnings ratio (P/E ratio) compares the price of a share with a company’s earnings per share, and this tells investors how much they are paying for each dollar of earnings. Divide a firm’s quarterly or annual income (without dividends) by the total number of outstanding shares to arrive at earnings-per-share (EPS), which measures a company’s profitability. The higher the EPS, the more valuable and profitable the company is.
The following is a list of stocks, along with their industry and three-year sales growth, that analysts have designated as growth stocks:
- Tesla (NASDAQ:TSLA) – Automotive – 40%
- Netflix (NASDAQ:NFLX) – Entertainment – 18%
- Etsy (NASDAQ:ETSY) – E-commerce – 48%
- Amazon (NASDAQ:AMZN) – E-commerce and cloud computing – 22%
- Salesforce.com (NYSE:CRM) – Cloud software – 21%
- Shopify (NYSE:SHOP) – E-commerce – 52%
- Alphabet (NASDAQ:GOOG) – Digital advertising – 22%
Investing in exchange-traded funds (ETFs) or growth mutual funds is an additional strategy to purchase growth equities. Growth funds can be divided into:
- Market capitalization: the aggregate size of the companies in the fund, broken down into small-, mid-, and large-cap categories.
- Location: the locations of the companies that make up the fund; for instance, companies situated outside of the United States compose foreign growth funds.
- Sector: Information technology, healthcare, financials, consumer discretionary, industrials, consumer staples, energy, real estate, materials, and utilities are the thirteen S&P 500 sectors.
Growth funds with significant holdings in a single industry, like technology, may see a decline in value if that industry faces a downturn. Spread your investments over a number of mutual funds or exchange-traded funds to reduce that risk.
The top-performing ETFs and mutual funds for growth are included below, along with an analysis of their expense ratios. If an investment is $10,000, an expense ratio of 0.05% would result in a $5 annual charge.
- Vanguard Growth Index Fund Admiral Shares (VIGAX) – this fund has a 0.05% exposure to 250 equities and passively tracks the CRSP U.S. Large Cap Growth Index.
- Fidelity Blue Chip Growth Fund (FBGRX) – actively managed, tied to the Russell 1000 Growth Index – 0.76%
- Schwab U.S. Large-Cap Growth Index Fund (SWLGX) – tracks the Russell 1000 Growth Index – 0.035%
- iShares Russell 1000 Growth ETF (IWF) – tracks the Russell 1000 Growth Index – approximately 500 stocks – 0.18%
- SPDR Portfolio S&P 500 Growth ETF (SPYG) – tracks the S&P 500 Growth Index 231 stocks – 0.04%.
Pros and Cons of Growth Investing
Pros:
High returns: Some returns can be really impressive. For example, when Amazon started trading in 1997, its shares were valued at $18. As a result of several stock splits, one share became twelve shares. Today, a single share is selling for $116.25, a gain of 11,525%.
Common good: Investors are the ones who introduce new businesses, innovations, and concepts to the market. As an illustration, Tesla investors are assisting in the global reduction of carbon emissions, demonstrating that it is possible to prosper while doing good.
Cons:
Timing – When it comes to growth investments, timing is everything. If you purchase during an upswing in price and sell at the pinnacle, everything will work out, but there’s a chance the price curve will revert or you’ll have to settle for less than you had hoped.
A long time to a profit – It can take a long time for a company in a rapidly expanding industry to generate a profit; Amazon didn’t turn a profit until 2003, nine years after its establishment and seven years after going public.
Segment downturns – Investors in online shopping start-ups and communications companies were left holding the bag during the early 2000s dot.com crash when businesses like Pets.com, Webvan, Worldcom, NorthPoint Communications, and Global Crossing went out of business; even though Cisco survived, its stock value dropped by 80%.
Also read this: The Top 7 International Stock Funds to Invest in 2024
FAQs
What is the difference between growth and value investing?
The goal of growth investing is to identify businesses that, despite their greater valuation, have significant growth potential. Value investing is the process of identifying businesses at a lower valuation than an investor believes they should or can be.
How do I find good growth stocks?
The goal of growth investing is to identify businesses that, despite their greater valuation, have significant growth potential. Value investing is the process of identifying businesses at a lower valuation than an investor believes they should or can be.
What are the risks of growth investing?
The best time to buy and sell a growth stock is not only to time them correctly, but also to time them for the company, its industry, and the market.
Conclusion
To sum up, investing for growth is a complex process that is aided by methods designed to capitalize on the potential of changing markets. The eight best techniques that are discussed here are cornerstones for investors who want to succeed in navigating and making growth-oriented investments. Each strategy offers priceless insights and tactics that are essential for success, from embracing volatility and diversification to conducting extensive research and exercising due diligence.
Through a comprehensive grasp of market trends, corporate fundamentals, and risk management, investors can effectively leverage favorable circumstances and minimize possible drawbacks. In the end, these tactics, when combined with flexibility and discipline, enable investors to build wealth and meet their long-term financial goals in the dynamic field of growth investing.
