Characteristics of Good Growth Stocks
Your investment strategy plays a major role in getting your profit, or lack thereof. One of the most popular ways that investors use is known as a growth investment strategy.
This strategy is centered around finding and investing in stocks that have experienced attractive growth in recent history, and capitalizing on their ongoing growth potential.
A Good Growth Market
For any sized business company to grow, it is going to have to play in a market that’s poised for growth or is already in growth mode. If the industry is at the tail end of its growth trajectory, it isn’t considered a growth market. For example, now may not be the best time to invest in a personal computer hardware vendor but it could be the best time to get in on a mobile app start-up.
In addition to operating in a high growth industry, the stock you select has to have a commanding market share. You don’t need to get stuck with the third or fourth player in an emerging growth market. Nor do you need a one-trick pony, which means investors should look for companies that will be able to sustain their competitive benefit. Is the business company coming out with many innovative, successful items? Or does it continue to ride its first success? These are questions investors need to consider.
Sustained gains in share value will only occur if the company you invest in maintains profitability growth. Who wants to keep piling money into a company that lost it all?
Determining revenue growth is a simple process, thanks to the tools provided by Nasdaq. To access this tool, visit the Nasdaq website and search for the stock ticker you want to research. To the left of any stock profile is a link titled Earnings which you can click on for more details.
The resulting page will have a graph showing earnings per share every 3 months for the past year. Look for consistent quarter-on-quarter revenue growth. Also, watch for revenue surprises. Stocks that have all the positive earnings surprises consistently beat analyst expectations — a good sign for growth stocks.
Free Cash Flow Growth
Money flows in and out of a business like water. Free cash flow represents the net amount of money flowing into the business after all outflows are considered. It differs from profitability in that free cash flow does not measure non-cash expenses such as depreciation.
It is important to ensure there is consistent growth in cash. This can be seen by looking at the company’s balance sheet for 4 consecutive quarters.
Growth investments are often most attractive in a healthy economy, where companies benefit from increased demand and rising corporate and consumer spending. However, certain key factors can help a growing company thrive in all types of economic environments.
In general, companies that see their growth accelerate will often see their shares rise as well. But not every growing company is the same, which means a higher risk assessment and ongoing active awareness of growth investing is needed. Growth investing can reap some of the greatest benefits, but it also carries some of the highest risks. Knowing how to identify the best and market longevity, they can easily narrow the universe and generate higher portfolio returns.