How to Find Growth Stocks

Daniel Penzing
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One way to increase your wealth is to invest in growth stocks. Read on to find out how.

In the world of investing, it is important that you take the time to learn about and understand the companies with which you want to do business. There is arguably no company providing a more relevant example for those looking to learn about investing than Apple. Since its initial public offering in 1980, Apple has experienced explosive growth. From humble beginnings in the garage of the late Steve Jobs and Steve Wozniak, Apple’s stock has seen an upward trajectory not unlike a rocket.

When people look back at the high rate of Apple’s growth, there are two primary success factors that jump out:

  • Focus
  • Innovation

It is fundamental that every company maintain a singular focus in order to grow. This is where Apple sets itself apart from its competitors. Apple focused on a product that was an essential household item – the home computer. The execution just happened to be with a sleek looking piece of hardware with a mouse. The hardware industry was already well-established with familiar names such as Dell, IBM, Gateway, Compaq and Acer. Apple chose to focus on their strength and keep their product prices competitive.

What Is a Growth Stock?

A growth stock is a stock that has a high growth rate. The growth comes from earnings growth or dividend growth. Generally, companies will announce high earnings growth or a high dividend increase, creating an opportunity for growth investors to profit from these stocks. Growth stocks provide the potential for long term capital gains. Growth investors are looking for stocks that have a chance for price appreciation, and they take a longer term view of investing. If you're more looking for value than growth, check out these value stocks.

Where Can I Find Growth Stocks?

If you want to buy growth stocks, you need to first decide what kind of growth stocks you’re after. There are many ways to slice it when it comes to specific types of growth stocks.

One way to do this is to simply look for companies with significant growth in both sales and earnings. This means firms that have increased their profits year after year and are now likely to see their stock prices increase along with their earnings and sales.

A slightly different way to think about growth stocks involves looking at growth in terms of a multiple of total assets.

Here, stocks with a high growth ratio might actually not see much of a surge in stock price if the firm’s revenue and earnings growth are lower than its asset growth.

A final way to think about growth stocks is to look for innovative companies that have created new products or services, or are involved in other activities that have the potential to create a competitive advantage. In other words, you’re looking for firms that are better able to corner the market and sell more products due to their unique, proprietary, and competitive practices and/or products.

There are many tricks and concepts to consider when looking for growth stocks; therefore, start by learning more about the companies you’re interested in.

What Are the Drawbacks of Growth Stocks?

First, let’s talk about the upsides of investing in growth stocks. There are three main benefits. First, as the name implies, growth stocks have the potential to have greater growth than value or dividend stocks.

Second, growth stocks have the potential to realize returns that are more explosive than either value or dividend stocks. Third, growth stocks are, well, “gummint” stocks.

The money that might otherwise go toward stocks with equity characteristics goes first to the “gummint,” which is primarily a bond investor. When the federal government needs to raise money, it sells bonds. If it needs to raise a lot of money, it sells a lot of bonds.

This can lead to a lot of demand for stocks, in particular, value stocks. Growth stocks, meanwhile, often trade to high multiples and can benefit from this demand.

How Does a Growth Stock Differ From a Value Stock or an Index Fund?

If you’re new to the world of investing, you might be confused about what all of the terms like “growth stock” and “value stocks” really mean. There are many different ways to classify stocks, and learning how to find growth stocks is the first step in understanding how the world of investing really works.

For those who have been around the investment world for a while, the world of valuing stocks can seem a bit like a foreign language. But if you think of stocks in terms of a basic analogy, it will be easy to understand why some people prefer growth stocks to value stocks.

Imagine the stock market as a restaurant, and the individual stocks are the individual foods on the menu. There are all kinds of foods on the menu, and some foods are more valuable than others. You’re probably familiar with the “value meal” option at every fast food chain. For a little extra money, you get a better value. You’re not necessarily buying a better product, but you are getting more food for your money.

Ask Yourself These Questions Before Investing in Growth Stocks

When you hear the word growth stocks, are you thinking of signs of a vibrant, prosperous future? Or are you thinking about your waistline? Before you take the plunge, it’s a good idea to ask yourself some questions, including:

  • Why Are You Looking to Invest In Growth Stocks?
  • What do you want to use growth stocks for? Are you looking for long-term growth? Are you thinking about your college education down the road? Or are you just looking for a quick return on your money?
  • What Kind of Growth Are You Looking For?

Some growth stocks are going to be more profitable and reliable than others. Knowing what kind of growth you’re looking for will help you understand the process of investing a bit better.

How Do You Choose From a List of Growth Stocks?

This is a great question. Why? Because different stocks are for different kinds of investors. Some stocks are going to be relatively low-risk while others are going to be high-risk and present huge rewards. Again, it might help to define what kind of growth stock investor you are before you start browsing through a list of stocks.

What Kind of Growth are You Looking for?

Investing in Your Future

Warren Buffett, arguably the greatest investor in the world, said that “in the business world, the rearview mirror is always clearer than it is in the windshield.” While that’s certainly true, it doesn’t mean that you should ignore the past entirely. Most investors do a thorough amount of research before buying a stock or an investment. They spend hours reading about the company, its history, its products, and its future.

While you don’t need to spend as much time as Buffett does, you should always be interested in learning some background information before you make an investment. To help you do that, we’ve compiled a list of questions to ask yourself before you start researching a company.

What is the company’s public image?

If everyone in the world was to unexpectedly shut down their computers tomorrow, what would the public remember about company? More specifically, what would the public remember about the company’s products, service, and/or industry position?

Is the company a solid investment?

Companies tend to wrestle with either growth or sustainability. It’s rare for a company to master both. But when it comes to making decisions on stocks to buy, you should look for the growth companies.