Investing in Growth Stocks can be a great way to make some good money in the stock market. The key, of course, is knowing which growth stocks to buy and when. The following is a practical guide to choosing growth stocks abroad. It is hoped that this way you can choose good US stocks for long-term savings.
What are growth stock types?
Growth stocks are stocks of companies that have increased earnings, both earnings and revenue, which are much faster than the average for other companies in the same industry or the market as a whole.
The growth stock type, however, involves much more than picking an uptrend or rising stock.
A business that grows faster than average for a long period of time tends to be more valued by the market.
This can provide good returns to shareholders in the process.
The faster a business grows, the bigger the results.
Unlike value stocks, high-growth stocks tend to be more expensive than the average stocks of various metrics such as Price to earnings, Price to free cash ratio and Price-to-sales.
However, despite the price tag which is generally super premium, the best growth stock types can even provide returns that generate cash for investors when the stock can fulfill its extraordinary growth potential.
In short, growth stock is a type of company stock that has a level of income, either earnings or revenue, that is faster than the average business in the same industry or market as a whole.
How to identify growth stock
So, do you know what growth stock is? Now how do we know that a stock is a growth stock?
In general, there are 3 steps in identifying growth stocks, namely:
Identify strong long-term market trends and the companies that are best positioned to profit from those trends. Make a list to make it easier.
Narrow the list of stocks identified earlier to only companies that have a very strong competitive advantage.
Narrow the list again to companies with a large target market.
Let's talk briefly, shall we?
1. Get to know the trends and companies that are working
Companies that can capitalize on strong long-term trends can increase their sales and profits over the years, generating wealth for their shareholders in the process.
For example, the occurrence of the corona virus pandemic has accelerated many trends that were already going well.
From these trends a list can be made as in the following example:
E-commerce: Due to the pandemic, more and more people are shopping online. Companies like Amazon (AMZN) and Shopify (SHOP) are well positioned to make a profit in the US due to these online shopping trends. Meanwhile, Alibaba (BABA) and JD.com (JD) dominate e-commerce in China. There is also MercadoLibre (MELI) which holds the leading online retail market share in Latin America.
Digital advertising: Facebook/Meta (FB) and Google/Alphabet (GOOG) have the largest share of the digital advertising market and have the potential to earn huge profits as marketing budgets shift from TV and print media to online media.
Digital payments: Square (SQ) and PayPal (PYPL) are examples of companies helping accelerate the global shift from cash to digital forms of payment by enabling businesses to accept debit and credit card transactions.
Cloud computing / cloud computing: As the supporting infrastructure for the digital industry, cloud infrastructure services such as Amazon (AMZN) and Alibaba (BABA) are the most dominant examples of companies helping to make this happen, while Salesforce.com (CRM) provides some of the best cloud-based software available. available.
Digital entertainment and streaming: As internet connections advance, millions of people have canceled their cable TV subscriptions in favor of cheaper and more convenient streaming options. As a global leader in streaming entertainment, Netflix (NFLX) offers a great way to profit from this trend.
Remote Working: For many organizations, remote work arrangements through Work From Home (WFH) have become a necessity during the COVID-19 pandemic. Companies like Zoom (ZM) will continue to capitalize on this trend with the power of user-friendly cloud-based phone and video collaboration tools.
The point of this strategy is to try to invest in such types of trends and companies as early as possible. The earlier you enter, the more money you get.
In fact, the strongest trends can last for years and even decades. This gives us plenty of time to join in on getting a share of the money these companies make.
2. Focus on companies with competitive advantages
It should be noted that it is also important to invest in growing companies that have a strong competitive advantage.
Otherwise, its competitors may soon pass it, and their growth may not last long.
So it is necessary to prioritize and focus on shares of companies with competitive advantages.
Some examples of competitive advantages such as:
Social Media Effects: Facebook can be a prime example. Everyone who joins its social media platform makes it more valuable to other members. Network effects can make it difficult for new entrants to replace the current market share leader, and Facebook's more than 2.5 billion users certainly make new social media companies unlikely to replace them.
Scale Advantage: Size can be another strong advantage. Take Amazon as an example. Because of its large global distribution network is something its smaller competitors will find very difficult to imitate.
High switching costs: Switching costs are the costs and difficulties involved in switching from one product to a rival product or service. Shopify for example. As an online retail operating system for more than 1 million businesses, Shopify is an example of a high switching cost business. Once a company starts using Shopify as the core of its online operations, it's likely not going to bother switching to another competitor.
3. Define a company with a large target market
Finally, of course, we want to invest in companies with a large market both in terms of targets and management that can be handled.
In addition, from the big target, it would be better if there is still room for further growth in the future.
Industry reports from well-known research firms such as Gartner (IT) and eMarketer can be of great help in this regard.
Reports from these research firms can provide estimates of industry size, projected growth, and market share figures.
The bigger the opportunity, the bigger the business in the end.
What's more, the earlier the growth cycle begins, the longer it can continue to grow at an impressive rate.
Here's a short infographic:
Recommended growth stock type
As a few examples, here are 10 amazing growth stocks currently available on the American stock market.
Keep in mind that the nature of the following stock list is only an example of a recommendation and is not a real recommendation that you should believe and buy to collect in your portfolio.
Do your own research and sort through the list of stocks that you think are growth stocks.
List of Stocks Growth Stocks
E-commerce Industry:
Shopify (SHOP) – CAGR 183%
MercadoLibre (MELI) – CAGR 58%
JD.com (JD) – CAGR 29%
E-commerce and Cloud Computing Industry:
Amazon (AMZN) – CAGR 28%
Alibaba (BABA) – CAGR 63%
Digital Payment Industry:
Square (SQ) – CAGR 63%
Paypal (PYPL)
Digital Advertising Industry:
Google (GOOG) – CAGR 18%
Facebook / Meta (FB) – CAGR 48%
Movie Streaming Industry:
Netflix (NFLX) – CAGR 29%
Cloud Software / SAAS Industry:
Salesforce (CRM) – CAGR 26%
CAGR = compound annual growth rate. Quarterly financial report data compiled from Morningstar.
The risk of growth stocks
Investing in any company's stock instruments generally contains risk factors such as overall market risk and business risk.
The characteristics of growth stocks can make them riskier than value stocks.
As the name suggests, growth stock type companies tend to be in a growing business phase.
This growth stage may consist of younger, smaller companies with unproven product track records or entities that are likely to use the majority of their revenues and raise capital to grow the business.
In closing, whatever investment you choose, of course the decision is completely in your own hands.
As a result, the responsibility and consequences, both positive and negative, are borne by each.
Greetings, buddy.
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