Buying a growth stock may be one of the best choices an investor can do. Growth investing is a strategy that requires investors to buy the right companies early on.
Of course, when searching for the best stocks, it’s not easy to know which one has the greatest growth potential and which one doesn’t have them. It’s also quite difficult to know whether the stock is at the early stages of growth or is already on a downward curve.
So, let’s look at the following characteristics to help you find the perfect growth stock for you.
Expanding Market
The best growth stock moves their toplines rapidly in decades. This is quite a challenging task for a company, unless that company is benefitting a large and expanding market opportunity.
Some huge companies pull off this feat by making the best out of a market opportunity. One company may have a simple business model like online selling of books, but it could take advantage of the technology and disrupt the world of ecommerce.
At the same time, growth companies show great willingness and capability to enter into adjacent markets.
Competitive Advantage
One of the most followed rules in investing is to pick a company with a solid competitive advantage. This is the company’s ability to maintain its advantage against rivals for extended periods of time. There are generally four types of competitive advantage:
Network Effect
When a new member hops in and joins the company’s network, the members of the network enjoy additional value.
High Switching Expenses
Customers tend to stay with the brand or company for longer if it is generally more expensive to switch to a competing product.
One very good example of this can be found in the world of banking. When a person’s bank account is linked to his paycheck or bills, it becomes very difficult for him to consider switching to another bank.
Cheap Production
The company may benefit from scale, technology, or geography that give them advantage. All of these may help the company cut down on costs in terms of a service or product’s production.
And when the company’s cost of production is lower than its competition, then it can charge lower prices to customers and it will still enjoy better returns.
Intangible Assets
Intangible assets include many things like branding, patents, trade secrets, and regulatory protection. For instance, luxury brand may have the intangible asset of a brand name, in which customers by the products to show that they are using the brand.
Financial Strength
Another characteristic of a good growth stock is financial strength. Remember that the economy is high unpredictable, and that means that sooner or later the company will face some hard times.
Because of this, investors ought to bet on companies that can fund their future growth need with internally generated profits rather than just being dependent on functional financial markets.
Slow or no-growth businesses that depend on acquisitions to post growth should not be approached. Buying other companies can be very expensive. The acquirer may have to issue new shares. Meaning there could be high levels dilution.
All of that don’t sound good for a growth company.
