The stock market can offer a way to build wealth and make a living. The key is knowing which growth stocks to purchase, and when.
Many growth stocks were routed through the first two-thirds of 2022. The S&P 500 crashed roughly 20%. But, the S&P 500 Growth indice fell 28% through six months. Stock prices dropped by up to two-thirds or more in some growth stocks. Now could be a great time for you to invest in growth stocks with strong fundamentals.
Here’s a quick guide to growth investment. These tools and strategies can help you position your portfolio for success long-term with growth stocks.
What is a growth share?
Growth stocks are companies whose revenue and earnings increase at a faster rate that the average business in the industry or the entire market. Investing in growth is not limited to picking stocks that have risen.
A growth company may have an innovative product, service, or business model that is increasing market share or entering new markets.
Markets will reward businesses that can grow faster than the industry average over long periods. This results in substantial returns to shareholders. The return potential is greater the faster they grow.
Unlike value stocks, high-growth stocks tend to be more expensive than the average stock in terms of profitability ratios, such as price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios.
Although they have a high price tag, the best growth stock can still generate fortune-creating return for investors as long as they meet their phenomenal growth potential.
Despite this, growth stocks have suffered a significant market decline in 2022. The future value of growth stocks has been reduced by high inflation, which puts pressure on them. Some have had difficulty scaling up while others have had to do with supply chain constraints. These and other macroeconomic influences also impact the economy. While growth stock prices may remain low, long-term buyers might be able to take advantage of the downturn and buy stocks.
Stocks that show great growth
These 10 stocks are excellent growth stocks and can be found on the stock market today.
Data sources include Morningstar, YCharts, and quarterly financial reports. Data correct as of August 8, 2018. (CAGR = Compounded Annual Growth Rate.
COMPANY 3-YEAR SALES AGRROWTH CAGR INDUSTRY
Tesla (NASDAQ:TSLA) 40% Automobile
Shopify (NYSE:SHOP) 52% E-commerce
Block (NYSE:SQ) 56% Digital payments
Etsy (NASDAQ:ETSY) 48% E-commerce
MercadoLibre (NASDAQ:MELI) 63% E-commerce
Netflix (NASDAQ:NFLX) 18% Streaming entertainment
Amazon (NASDAQ:AMZN) 22% E-commerce, cloud computing
Meta Platforms (NASDAQ:FB) 22% Digital advertising
Salesforce.com (NYSE:CRM) 21% Cloud software
Alphabet (NASDAQ:GOOG), (NASDAQ:GOOGL) 22% Digital advertising
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This list shows you that growth stocks come from all walks of life. They can be found across a range of industries within the U.S. or in international markets. And although most of these stocks are larger businesses, it is possible to find growth opportunities in smaller companies.
An exchange traded fund ( ETF ), which allows investors to invest in large numbers of low-capgrowth stocks, such as vanguard Small-Cap ETF ( :NYSEMKT). This fund tracks and invests in the CRSP US Small Cap Growth Index.
Importantly the Vanguard Small-Cap Growth ETF has a cost ratio of only 0.07%. This means investors will be able to receive most of the fund’s return, with Vanguard receiving a minimal amount in fees. (An annual expense ratio 0.07% equals $0.70 per 1,000 invested per year.
How to find growth stock
To find great growth stock, you’ll need:
Identify strong long-term market trends, and identify the companies that can profit most from them.
Focus your search on businesses that possess strong competitive advantage.
You may also narrow down your selection to companies with large market potential.
Identify trends to identify the companies driving them
Profitable companies that are able capitalize on strong long-term trends for growth can see their sales rise and profits increase for many years. It can also create wealth for shareholders.
Many trends that were already well established were further accelerated by COVID-19. Here are some examples.
Amazon.com, Shopify.com, and Etsy. are all well-positioned to reap the benefits of online shopping in the United States (and many other countries). MercadoLibre owns a major share of Latin America’s internet retail market. While customers have begun to return to physical stores starting in 2022, ecommerce still has plenty of growth potential.
Digital advertising: Alphabet or Meta (formerly Facebook), owns the majority of the digital ads market. These companies are poised to earn handsomely as the marketing budgets shifts from TV and print to the internet. Amazon has built an extensive advertising business, and is continuing to expand into other formats. Netflix is starting to use advertising to increase its subscriber count and increase its revenues.
Digital Payments:Â Square (formerly Square) helps to accelerate the global transition from cash to online forms of payment . By allowing businesses of any size to accept debit/credit card transactions, it is helping to speed up the shift from cash to .
Cloud computing This is a transition from on-premise datacenters to cloud-based server. Amazon and Google cloud infrastructure services make it possible. Salesforce.com is known for its cloud-based enterprise solutions.
Cord-cutting & streaming entertainment: Millions renounce their cable subscriptions in favor of streaming alternatives that are cheaper and more convenient . Netflix is the global leader streaming entertainment. However it faces growing competition from other media company.
Remote employment: Many organizations saw the need for remote work arrangements during the pandemic. Remote work will continue to grow even after the pandemic. Flexible working arrangements are expected to bring financial savings and other benefits for employees.
Electric vehicles . The world is shifting away from its dependence upon gasoline to use electricity to power its vehicles. According to a survey by industry executives, half of all car sales could be e-vehicles in 2030. Tesla is the dominant player in this space, with its extensive range of vehicles as well as its battery technology.
The key is to invest in these types and companies as soon as possible. You will make more if you invest sooner. But, powerful trends can endure for many years or even decades giving you plenty time to reap the rewards.
Prioritize companies with competitive advantages
It’s important to invest only in companies with strong market competitive advantages. Without this, they could lose out to their competition, and their growth might be short-lived.
Especially important during periods of high inflation and the pandemic are times when competitive advantages are essential. Companies that have a strong competitive position will survive and thrive in times of market downturns.
In fact, there was a significant sell-off of many tech-focused technology stocks at the start 2022. Many top-growth stocks saw share prices fall by more that 50%. It is possible to identify stocks belonging to companies that have strong competitive advantages, and sell them off together with the rest. This could provide huge returns once they recover.
There are several competitive advantages.
Meta Facebook’s prime example is an example ofNetwork effects. Each person who signs up for its social media platform increases its value to other users. Social media network effects Can make it difficult for new competitors to take over market share. Facebook’s vast user base of 2.9 million makes it unlikely that anyone will be able to compete with it.
Scale advantages: The size of a website can provide another strong advantage. Amazon is a great example of this category, as its large global fulfillment network is something that smaller rivals will not be able to replicate.
Expensive switching costs: This refers to the cost and difficulty of switching from one product or services to another. Shopify, which provides an online retail solution for more than 1,000,000 companies, is an excellent example of high switching fees. Shopify is used by most companies as their core online platform. They are unlikely to change to other competitors once they have started to use it.
Look for companies with large markets
Finally, it is important to invest in businesses that have large addressable markets. There are still long runways for growth. These reports, from research firms such Gartner NYSE.IT and eMarketer, can be very helpful.
A company’s potential size will determine its ability to grow. A business’s growth can be extended if it is earlier in its cycle.
