Growing stocks can be a great way of generating wealth that will change your life. It is important to determine which growth stocks you should buy and when.
Many growth stocks were routed in the first half 2022. The S&P 500 index crashed around 20%. However, the S&P 500 Growth Index fell 28% in the first six months 2022. Stock prices fell by as much as half to two-thirds in some growth stocks. This is a great time to invest if you are able to identify a strong growth stock.
Here’s a guide to growth investing that will help you get started. These strategies and tools will help you position your portfolio to achieve long-term success using growth stocks.
What is growth stock?
Companies that have a higher revenue and earnings than average businesses in their industry or market are called growth stocks. However, growth investing is more than just picking stocks that are rising.
A growth company often has an innovative product or service, which is helping to gain share in existing markets or enter new markets or create entirely new industries.
Markets reward businesses that grow faster than the average over long periods of time, which can result in handsome returns for shareholders. The returns are often greater if they grow faster than average.
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.
The best growth stocks, despite their high price tags can still provide fortune-creating returns for investors if they reach their incredible growth potential.
However, the market has taken a beating for growth stocks in 2022. Inflation has brought pressure to growth stocks as it lowers their future earnings. Supply chain restrictions have also impacted the ability to scale up, while macroeconomic factors affect the whole economy. Long-term investors may be able to buy growth stocks at a lower price, but the downturn could provide a buying opportunity for them.
Stocks of great growth
Here are 10 outstanding growth stocks that you can find on the stock exchange today.
Data sources: Morningstar and YCharts. Quarterly financial reports of companies. All data accurate as of August 8, 2022. (CAGR = compound annual rate of growth.
COMPANY 3 YEARS SALES GROWTH CAGR INDUSTRY
Tesla (NASDAQ:TSLA) 40% Automotive
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% Cloud computing and E-commerce
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 that growth stocks come in many sizes. These stocks can be found in many industries both in the United States and abroad. Even though all of the stocks are large businesses, small companies can still be a good investment spot for growth investors.
An exchange-traded fund ( ETF ), such as Vanguard Smal-Cap Growth ETF, is a great way to invest in many small-cap stock options. This fund tracks the performance in the CRSP US Small Cap Growth Index. It allows investors to easily invest in approximately 580 small-cap companies at once.
The Vanguard Small-Cap Growth ETF is very low in expense ratio at 0.07%. Investors will get almost all the fund’s returns with Vanguard paying only a small percentage. An annual expense ratio (0.07%) equates to $0.70 per $1,000 invested each year.
How to Find Growth Stocks
You will need to:
You can identify long-term market trends that are powerful and position your companies to profit.
Reduce your search to companies with strong competitive advantages.
You can further narrow your search to include companies that have large addressable markets.
Identify the trends and the companies that are driving them
Companies that capitalize on long-term trends are more likely to increase sales and profits over the years. This can generate wealth for shareholders.
Many trends were already in full swing before the COVID-19 pandemic. These are just a few examples of trends that you can profit from.
E-commerce : With more people shopping online, Amazon, Shopify and Etsy have the opportunity to make a profit in the U.S.A. (and other international markets). MercadoLibre is the leader in Latin America’s online retail market. While many consumers are returning to physical stores by 2022, ecommerce has huge growth potential.
Digital advertising: Alphabet and Meta (formerly Facebook) own the majority of the digital advertising market. They are poised for huge profits as marketing budgets shift away from print and TV to online channels. Amazon has created a huge advertising business that continues to expand into new formats. Netflix is beginning to embrace advertising as a means to grow its subscriber base, and increase its revenue.
Digital payments: block (formerly Square), is helping to accelerate global cash-to-digital payment shift by allowing all businesses to accept credit and debit card transactions.
Cloud computing : Computing power moves from on-premise data centres to cloud-based servers. This is possible thanks to Google and Amazon’s cloud infrastructure services, and Salesforce.com offers some of the most powerful cloud-based enterprise software.
Cord-cutting, streaming entertainment: Millions are switching to cheaper and more convenient streaming options. Netflix is the global leader of streaming entertainment. However, it faces increasing competition from other media corporations.
Remote work Many organizations found that remote work was a necessity during this pandemic. Research shows that remote work will not end after the pandemic, as companies recognize the financial efficiencies of flexible working arrangements and the workforce benefits.
Electric cars: The world has begun to shift away from gasoline-powered vehicles to electric ones. According to a survey of executives in the industry, half of all new auto sales could be e-vehicles by 2030.
Prioritize companies that have competitive advantages
These competitive advantages include:
Network effects. Meta’s Facebook shows this well. Every person who joins a social media platform makes it more attractive to others. Network effects It can be difficult for new entrants in the market to replace the market leader. Facebook’s 2.9b users make it unlikely that any new social media company will take its place.
Scale Advantages: Size is another advantage. Amazon is an excellent example of this because it has a vast global fulfillment network that is very difficult for smaller competitors.
High switching fees: Switching expenses are the costs and difficulties associated with switching to a competitor product or service. Shopify, which is an online shopping platform for over 1 million businesses, is a prime example of a business that has high switching costs. Shopify is the heart of an online business’ online operations. It is unlikely that a company will ever need to switch to another competitor.
Look for companies that have large addressesable markets
You’ll also want to invest in companies with large market potential and long growth runways. This is where industry reports from research firms like Gartner and eMarketer can be extremely helpful. They provide estimates of the size of the industry, forecasts for growth and market share figures.
A business’ potential growth is dependent on the size of the opportunity. It can grow at a remarkable rate if it starts its growth process earlier.
