Some of the best results when investing in stocks come from picking the right growth stocks. Companies that dominate the news may have grown several percent in the last year and may be paying a healthy dividend. But the best growth stocks will have doubled or tripled in value over the same time frame. Knowing how to choose a growth stock is the first step along the way to taking advantage of one of these investment opportunities.
What Is a Growth Stock?
Basically, a growth stock is one whose stock price increases rapidly. This is opposed to a stable and slowly growing company that pays dividends to its investors. A growth stock is one that generates sustainable cash flow which is typically reinvested in the company. This reinvestment then leads to more cash flow, more reinvestment, and more growth. These companies commonly have room to grow because of new products and services or new markets. Thus a true growth stock is not only growing rapidly but can be expected to continue its growth well into the future.
How Can You Find Growth Stocks to Invest In?
A simple way to develop a list of growth stocks is to use a stock screener. Look for sales or revenue growth and high growth of earnings per share. Consider price to earnings ratio and whether or not the company is paying dividends back to its shareholders. Your top results will typically not include the big companies that you read about in the financial news. A recent list of growth stocks from an article in Nerd Wallet includes the following:
|Last Year’s Growth Rate
|Aehr Test Systems
|Weatherford International plc
|e.l.f. Beauty, Inc
|Axcelis Technologies, Inc.
|Corporacion America Airports S.A.
|Bowman Consulting Group Ltd.
|Sterling Infrastructure, Inc.
What Does the Company Do to Make Money?
When you have found stocks like the ones we list here, how do you know they will keep growing? The best way is to take a page from the playbook for a successful investor, Warren Buffett. Buffet only invests in stocks when he fully understands what they do to make money. And he only invests in those companies when he understands how their business model will keep making money into the future. This is called intrinsic stock value investing.
Will Your Choice of Growth Stocks Keep Making Money?
Using this approach we looked at a decidedly non-tech stock in our list, e.l.f. Cosmetics. Their website says it all, affordable drugstore makeup and skincare products. You can order their products online and they are available in your local drugstore. These folks do not have brick and mortar stores. Their stock rose by 247.45% over the last year. How has it done before that?
This stock has been listed on the New York Stock Exchange for five years this August. While it has grown impressively over the last year, it has also done well in the two preceding years. The stock is currently selling for eight times its price when it was first listed. Its business model of sales online and sales in someone else’s brick and mortar stores will help keep their costs down. At a time when people are making tough budgeting decisions because of inflation, a line of cosmetic and skin care products that have online and drugstore prices is likely to keep doing well for Warren Buffett’s preferred investing time period which is forever.
SlideShare Version – How to Choose a Growth Stock