Most investors appreciate the value of a consistent portfolio — one that generates expected returns on a dependable basis. But as comforting as those tried-and-true stocks are, they don’t always help investors realize their true earning potential.
A savvy investor looks for new opportunities. They’ll seek out companies that may be on the margins of the stock market now but are perfectly poised to grow exponentially in coming years.
In some vital way, these companies don’t fit the traditional structure of the industries they’re in. They’re doing something innovative, delivering a new service that customers didn’t know they needed in the past.
Many of them are rewriting the rules of the industry itself — eventually graduating to huge success and a permanent place in the global market.
These commodities need to be picked carefully, but when an investor jumps in on the right one at the right point, their portfolio can reap the benefits sooner than they think. We call these investments “growth stocks.”
What Are Growth Stocks?
Growth stocks are commodities that speculators believe have the chance to offer higher rates of return than the average stock offering. They’re issued by companies that expect to show big sales and revenue a bit more quickly than others.
Growth stocks are the central focus of the portfolios for many investors. They’re what drives a stockholder’s most sizable returns, at least in theory. The growth stocks definition implies that the company is thought to be in line to increase its business and profitability at a pace far faster than others.
The growth stocks definition distinguishes them from value stocks, which are undervalued shares in well-established companies with long records of financial success.
Those “safe” stocks are usually dependable sources of consistent, modest returns. Growth stocks, on the other hand, are firebrand commodities thought to have booming potential.
With that being said, finding a good growth stock among fields of upstart competitors can be tricky — they’re not always obvious candidates like Amazon or Facebook.
We’ll start by looking at some basic growth stock characteristics, followed by what makes for a stronger growth stock candidate.
Common Growth Stock Characteristics
Some of the most common traits growth stock examples hold include:
Higher Growth than Stock Market Average
Of course, this is the most obvious trait of a growth stock — it’s right there in the name! Its share price increases at a much higher and quicker rate than the stock market index average.
Higher Share Price
A growth stock is almost always more expensive than other stocks. That’s because investors are willing to bet on its eventual boom and line up to buy shares, driving the price-per-earnings ratio and share price up.
But that higher share price will seem like a bargain five or ten years from now if investors turn out to be right and the company becomes a huge success.
No or Low Dividends
A growth stock company is highly focused on increasing its sales and revenue right now and in the near future. That means the business usually reinvests its earnings in itself, building out the company to generate more revenue. Therefore, growth stocks seldom generate dividend payouts to stockholders — the very few that do pay dividends at extremely low rates.
Competitive Edge
The growth stocks that are more likely to succeed come from companies that hold some kind of distinct advantage over competitors. This could be a proprietary and in-demand product, market dominance, significant intellectual capital, or something else that other contenders don’t have.
This edge is called a “unique selling proposition.” If it’s compelling enough, it helps the company grow and earn much faster than others of its kind.
Loyal Customers
“Loyalty” isn’t a tangible, measurable metric, unlike sales. But a company with a fiercely faithful customer base shows that its unique selling proposition is hitting its mark and is more likely to find widespread success.
A company with a strong fanbase is in a better position to take on the broader market and can be classified as a growth stock.
Market Disruption
Growth stock companies are often game-changers in their respective industries. They find problems that need to be solved or gaps that need to be filled. Oftentimes, they create their own niche and revolutionize the industry.
When we were getting DVDs from Netflix in the mail twenty years ago, we didn’t know we needed the streaming service we now take for granted. So a company that’s turning its industry on its head fits alongside other growth stocks examples.
Higher Risk
No matter how enthusiastic investors may feel about a given growth stock, there’s always going to be an amplified level of uncertainty and insecurity about it, at least in the short term.
A growth stock is likely to see a lot of share price volatility, sometimes for as long as a year or two. But weathering those risky times can result in a huge long-term profit if the investor has the stomach to stick it out.
Sectors with Most Growth Stock: Examples
While you can find examples of growth stocks in any business sector on the stock market, a few areas tend to have significantly higher concentrations than others. These growth stock hotbeds include the following:
Technology
This might be a no-brainer. The highest-profile growth stocks of the last quarter-century (and longer, to be honest) have come from the IT sector, including everyone from Microsoft and Apple to Amazon and Alphabet (aka Google).
Technological innovation is a never-ending aspect of modern society and that’s likely to stay the same for a while.
Healthcare and Biotech
Healthcare has dominated the market for the last couple of years. Along with the corporate giants who have worked to solve worldwide health problems, you’ll find some upstart companies looking to deliver new products for medical treatments and preventative medicine.
Innovative biotech companies are especially notable in this field — many are just an FDA approval away from the marketplace and a jump in stock value.
Renewable Energy
Energy companies are rethinking their product roadmaps because of environmental concerns over climate change. But many smaller companies offering solar, wind, and hydroelectric solutions are leading the way.
If their innovations can maintain widespread public support as the crisis grows more urgent, they may turn profitable as more energy users turn to renewable sources for power.
Online Retail and eCommerce
One word: Amazon. Just a couple of decades ago the Seattle company only sold books online; they’ve since become arguably the biggest industry disrupter in the history of business.
Amazon practically invented eCommerce as we know it, and other companies like PayPal, Alibaba, and JD.com have arisen in its wake.
The still-developing business sector has plenty of examples of growth stocks, but also a slightly higher number of boom-or-bust candidates.
Fintech
Technology is changing the face of the financial world almost as much as it is with healthcare and retail. Customers turn to fintech companies for modern-day banking services like payment processing, mobile banking, person-to-person lending, and complex financial software. Companies like PayPal and Square came to prominence during the fintech boom.
Emerging Markets
Companies headquartered in countries that are ramping up their involvement in the global economy are some of the most intriguing growth stocks examples on the exchange.
Emerging markets include countries like Mexico, Pakistan, Brazil, South Korea, and Indonesia — places that are transitioning from less developed economies to ones closer to the more up-to-date markets of the U.S., Japan, and Germany.
They also include large countries like China and Russia that are integrating more with the global market than they had in the past.
Examples of Historic Growth Stocks
Strictly speaking, every stock was a growth stock at some point. But over the last 30 years or so, a few of them have shown exceptional growth that heartily rewarded their early investors.
Amazon
We’ll not dwell too much on the obvious. Let’s just say Amazon’s share price is up over 210,000% — that’s percent — since its initial public offering. If you invested $20,000 in Amazon in 1997, it would be worth about $42.6 million now.
Jack Henry & Associates
A fintech company that services the financial sector, Jack Henry got a huge head start on the fintech landscape — it went into business in 1985.
Since then, its share price has increased over 210,000%, but mostly in the last five years as advanced fintech solutions have found their way into everyday lives. It took more than 30 years, but Jack Henry’s status as an early visionary has paid off handsomely.
Monster Beverage Company
Since 2002, Monster Beverage has amped up its revenue almost as much as the people who drink its high-caffeine product. It more than doubled its annual revenue between 2002 and 2012, resulting in a 20-year trailing return of more than 87,500%.
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