Investors have an excellent opportunity to make money on the stock market with growth stocks.
Detecting growth stocks can be extremely challenging. Therefore, we prepare this short guide to help you understand the nature of these small jewels that can elevate the performance of your portfolio.
In this article, we are going to discuss the following topics:
- What are growth stocks?
- How to find growth stocks?
- Best 10 growth stocks.
What are growth stocks?
Companies with higher annual revenue increase than that of other businesses in their relevant industry are called growth stocks.
Growth companies often have an innovative product or service, an ability to enter new markets or the courage to create entirely new industries.
Markets reward businesses that grow faster than the average over long periods, resulting in handsome returns for shareholders.
Unlike value stocks, high-growth stocks tend to be more expensive than the average stock in terms of financial metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios.
Even though they are considerably more expensive, the best growth stocks can still provide fortune-creating returns for investors if they analyze their potentials correctly.
How to find growth stocks? 2 Steps guide.
Detecting growth stocks can be a challenging task even for the most experienced financial analyst.
We broke the whole process into 2 simple steps:
- Identify long-term market trends that are most powerful and identify the companies that can profit from them.
- Limit your search to companies with substantial competitive advantages
Step 1 – Identify the market trends and the potential champions
Companies that capitalize on long-term trends are more likely to increase sales and profits over the years. This can generate significant wealth for its shareholders.
Many trends were already in full swing before the coronavirus pandemic.
These are just a few examples of movements that you can profit from.
- Electronic commerce: As more consumers shop online, the almighty Amazon (NASDAQ: BABA) and Shopify are well placed to make a handsome profit not only in the United States but also in other developed markets such as that of Canada, Germany, Australia. The Chinese giant Alibaba (NYSE: BABAB) and JD.com(NASDAQ:JD) that dominate the e-commerce industry in China are also an excellent example of growth stocks. MercadoLibre (NASDAQ: MELI) holds a large share of the Latin American online retail market.
- Digital advertising: Alphabet (NASDAQ; GOOG) and Facebook (NASDAQ.FB) hold the largest share of digital ad markets and stand to make a handsome profit as marketing budgets shift away from print and TV to online channels.
- Cloud computing: Computing power is moving from on-premise data centers to cloud-based servers. This is possible thanks to Amazon’s (NASDAQ; AMZN) and Alibaba’s cloud infrastructure services that provide some of the most reliable cloud-based solutions.
- Remote work: Many organizations found remote work a necessity in the COVID-19 era. Research shows that remote work will not stop after the pandemic. Corporations started to realize the pros and efficiencies associated with flexible working arrangements. Zoom (NASDAQ:ZM), probably will continue to be augmented from this trend due to its cloud-based phone system and video collaboration tools.
- Cord-cutting and streaming media: Millions are switching to cheaper and more convenient streaming services. Undoubtedly, Netflix (NASDAQ: NFLX), the world’s leader in streaming entertainment, is a great place to make a profit.
- Digital payment platforms: Square (NYSE:SQ), a digital payment platform, is helping to accelerate the global switch from cash to digital payments by allowing all businesses to accept credit and debit card transactions.
The earlier you invest in this companies the larger your profit-potentials will be
Historical data shows that the most potent trends can be long-term, sometimes lasting for decades. This gives you ample time to take advantage of them and claim your share.
Step 2 – Give priority to companies with significant competitive advantages
It is of paramount importance to invest in companies with substantial competitive advantages. These companies are the undisputed leaders in their sectors and competitors will probably fail to surpass them
Competitive advantages you can focus on are the following:
- High switching costs: These are the costs and difficulties associated with switching to a different product or service provided by a competitor. Shopify, an online shopping platform for over 1 million businesses, is an excellent example of a company with high switching costs. Shopify is the heart of an online business’s operations, and it’s doubtful that they will ever need to switch to another company.
- Scale benefits: Another decisive advantage is size. Amazon is perhaps the quintessential example of this, because its vast international network makes it very difficult for smaller competitors to duplicate.
- High sunk costs: Can you imagine another company trying to compete with Airbus and Boeing? Impossible! To create an aerospace corporation requires an extremely high initial investment. Potential competitors know and they are deterred. Airbus and Boeing are de facto monopolies.
- Network effects: Facebook is an excellent example of this. Every person who joins a social media platform makes it more helpful to others. New entrants can find it challenging to replace the market leader due to network effects. Facebook has more than 2.5 billion users, so it is unlikely that any new social media company will be able to challenge it.
Best 10 growth stocks.
Low-interest rates in all developed economies, higher corporate earnings, and global economic expansion are all reasons why growth companies continue to outperform their value counterparts in the United States.
The S&P 500 Growth Index returned 14.22% annually over the past five years. The S&P 500 Value Index only returned 12.94%.
Stocks have become extremely expensive since the bull market has been around a decade.
Value investors tend to be on the sidelines while growth investors struggle to find the best growth opportunities.
Based on the expected earnings growth over several years, we have identified the top 10 growth stocks to invest in right now. These companies are proliferating and will likely experience double-digit earnings growth in the next year.
| LOGO | NAME | CODE | COMPANY TYPE |
|---|---|---|---|
 | Vistra | NYSE:VST | Energy company |
 | Hexcel | NYSE:HXL | Industrial materials company |
 | International Game Technology | NYSE:IGT | multinational gambling company |
 | Valero Energy | NYSE:VLO | Transportation fuels company |
 | Kinder Morgan | NSE:KMI | energy infrastructure company |
 | Alkermes | NASDAQ:ALKS | biopharmaceutical company |
 | BioMarin Pharmaceutical | NASDAQ:BMRN | biotechnology company |
 | Amazon.com | NASDAQ:AMZN | Internet retail |
 | Sibanye Gold | NYSE:SBGL | metals mining company |
 | Caterpillar | NYSE:CAT | world’s largest construction-equipment manufacturer |
Table 1 – Best 10 growth stocks
Vistra
Vistra Corp., an energy company, is engaged in power generation and electricity supply. It operates in the following segments: Retail and Texas. The Retail segment sells natural gas and electricity to residential, commercial, and industrial customers.
The Texas and East segments are involved in electricity generation, wholesale energy purchases and sales, commodity risk management activities, and fuel production management. Vistra’s electricity generation operations are located in CAISO. The West segment is Vistra.
The Sunset segment includes generation plants with an announced retirement plan. Asset Closure is involved in reclamation and decommissioning of mines and plants that have been retired. The company was established in 1882, and its headquarters are in Irving, Texas.
Hexcel
Hexcel Corp. is involved in the manufacturing, marketing, and development of lightweight structural materials. This includes carbon fibers, special reinforcements, prepregs, and other fiber-reinforced material materials, honeycombs, adhesives radio frequency / electromagnetic interfere (RF/EMI), microwave absorbing materials and engineered honeycomb.
The company operates in the following segments: Composite Materials and Engineered Products.
The Composite Materials segment includes carbon fiber, specialty reinforcements resins prepregs and fiber-reinforced matrix material materials as well as honeycomb core product lines. Engineered Products includes lightweight composite structures with high strength, honeycomb products with additional functionality and engineered core. Roger C. Steele founded the company in 1946 with Roscoe T. Hughes as its headquarters in Stamford, CT.
International Game Technology
International Game Technology Plc is involved in designing, manufacturing and marketing electronic gaming equipment, software and network systems. It is a member of the Global Lottery, Global Gaming and Global Gaming sectors. Global Lottery is responsible for the global traditional lottery and iLottery businesses, including sales, operations and product development.
Technology and support are also provided by this segment. Global Gaming includes iGaming and sports betting, as well as sales, product management studios, global manufacturing operations, technology, and support. The company was established in London, United Kingdom on July 11, 2014.
Valero Energy
Valero Energy Corporation is involved in the production and marketing of transport fuels and other petroleum products. It has three business segments: Refining and Ethanol. The Refining section includes refining operations, associated market activities and logistics assets that support its refinery operations. Ethanol includes its ethanol operations and associated marketing activities as well as logistics assets that support it.
Diamond Green Diesel Holdings LLC is covered by the Renewable Diesel segment. The company was established in 1980, and its headquarters are in San Antonio TX.
Kinder Morgan
If you like Enterprise Products Partners’ bullish thesis, you will be just as enthusiastic about Kinder Morgan (KMI, $17.14) prospects in 2021 and beyond.
Kinder Morgan is the world’s largest energy infrastructure company, with 83,000 miles of pipelines running through it and 144 terminals located across North America. Kinder Morgan pipelines account for approximately 40% of the natural gas consumed in America.
Kinder Morgan is not the only one that has been struggling to find pipeline stocks. While shares have trended higher since November 2020, they remain below pre-pandemic levels. They are also more than 60% below 2015 highs.
Kinder Morgan offers the chance to purchase a stock at a low price in a sector that has been experiencing declines for years. While you wait, you get a 6% plus dividend!
Just returning to pre-pandemic levels would result in a 30% increase in current prices, excluding the dividend. This is a reasonable price in an environment where value is becoming increasingly scarce.
Alkermes
Alkermes Plc, a biopharmaceutical firm, is involved in the research, development, and commercialization of medicines that address the unmet medical needs of patients in major therapeutic areas. Aristada is used to treat schizophrenia in adults.
Vivitrol is an injectable medication that can be used to treat alcohol dependence and prevent relapses to opioid dependence after opioid detoxification. The company was established in Dublin, Ireland on May 4, 2011.
BioMarin Pharmaceutical
BioMarin Pharmaceutical, Inc is involved in the commercialization and development of treatments for patients with severe and life-threatening rare conditions and medical conditions. Its pipeline products are Vosoritide and Valoctocogene roxaparvovec. John C. Klock and Christopher M. Starr founded the company on March 21, 1997. It is located in San Rafael, CA.
Amazon.com
Except for a handful of companies like Zoom Video (ZM), who went from being a relatively obscure company to becoming an integral part the corporate America’s daily routine, few companies have benefited more from the lockdown economy as Amazon.com (3,354.72).
Amazon.com can fulfill almost any order you might have and deliver it to your door in less than 24 hours.
Here’s the problem.
While Americans are returning to the malls, it is likely that they will continue to buy a greater percentage of their online purchases than before the pandemic.
According to tr Wedbush who rates AMZN as Outperform (equivalent to Buy), revenue growth should slow in 2021, but stay above 2019 levels.
In other words, while growth may slow from last year’s record-breaking levels, it will still surpass pre-pandemic levels. Amazon’s profitability should increase as it increases operating expenses less slowly than revenue.
Amazon Web Services, Fulfillment By Amazon and ads should drive steady margin growth, with Prime members driving overall retail revenue growth.
AMZN is one the most desirable stocks to invest in for the rest of 2021…and likely for many years to come.
Sibanye Gold
Sibanye Gold Limited is a precious metals mining firm in South Africa, Canada, Zimbabwe, USA, Canada, and Argentina.
The company produces platinum group metals (PGMs), which include palladium, platinum and rhodium projects, as well as by-products such iridium and ruthenium. It also owns the Stillwater and East Boulder mines in Montana, USA; and the Columbus metallurgical compound, which smelts PGM-rich filter cakes from the material mined. It is also involved with the Kroondal and Rustenburg operations in South Africa; Mimosa, located on the southern part of the Great Dyke, in Zimbabwe; and the Driefontein and Kloof surface operations on the West Rand.
The Beatrix is located in the southern Free State. It also owns interests in surface tailings retreatment plants; the Marathon PGM Project in Ontario, Canada; Altar and Rio Grande copper-gold projects in north-west Argentina; Vygenhoek PGM and Hoedspruit PGM projects; and the Burnstone, southern Free State and gold projects. Sibanye Gold Limited was established in 2002. It is located in Weltevreden, South Africa.
Caterpillar
Caterpillar Inc., an American Fortune 100 company, designs, develops and engineers machinery and financial products. It also sells insurance to customers through a global dealer network. It is the world’s largest construction-equipment manufacturer.
Caterpillar, a heavy equipment manufacturer, is an excellent choice to continue the theme of infrastructure for the rest of 2021.
If you are bullish about construction and mining, it is only natural that you would be bullish about Caterpillar as the leading supplier of equipment to these sectors. Caterpillar manufactures compactors, asphalt pavers and excavators as well as backhoes.
Caterpillar traded mostly in a range during the years preceding the pandemic. Caterpillar shares are showing signs of life, with construction spending and infrastructure spending expected to increase in the coming years. This could continue well into 2022.
The Bottom line
It’s a great way of making money from stock appreciation. However, you must be able to identify the stocks you are buying. Investors who are looking to increase their portfolio’s value or ride the wave of success that can lead to huge cash growth will love growth stocks.
These stocks are issued by companies in an aggressive expansion phase, either because it is part of their business plan or because they have a large market share with proprietary technology or a Patent.
It can be challenging to predict the future of growth stocks, as many are startups that have just been founded. Investors can reduce their risk by adding value stocks to their growth stock portfolio. The risk level of each individual will determine the ratio.