Growth Investing involves a greater degree of volatility than dividend investing or even value investing. But it also has the potential for much bigger rewards.
Growth investing involves investing in fast-growing companies that are typically less established than blue-chip companies such as Qualcomm (QCOM), Google (GOOGL) and Exxon (XOM). Those global behemoths were once growth stocks themselves, but their period of rapid growth is behind them. The best growth stocks are smaller companies whose best is ahead of them.
In searching for growth stocks, you generally want to invest in companies that are growing – or projected to grow – earnings at a faster rate than the overall market. Companies growing at triple-digit rates, 100% or better, are among our favorites. (In fact, triple-digit growth has been a factor in most big winning stocks over the years).
That kind of rapid growth can overcome a number of smaller deficiencies: inexperienced management, competition, weak patent positions, etc. Furthermore, fast growth typically attracts the attention of institutional investors, who push share prices higher as they buy their way in.
Of course, the risk in growth investing is that you’re buying less mature companies that usually don’t pay a dividend. If the share price declines, you don’t have a quarterly dividend payment to cushion the fall. And these stocks can very volatile, especially during earnings season.
While fast-growing companies have a good chance to outpace the market—sometimes by a considerable amount—they also have the potential to fall flat. Some high-growth companies are so under the radar, or so misunderstood, that the share price appreciation doesn’t match the financial growth.
The key to successful growth investing is identifying fast-growing companies before the masses do. That can be tricky, since some of the best growth-stock candidates are relatively obscure. There’s a reason, after all, that the market hasn’t fully discovered them yet.
But keep things simple. Look for companies with accelerating sales, better-than-average earnings growth, and strong profit margins. More often than not, the combination of those three characteristics eventually grabs the market’s attention.
When it does, the rewards can be astonishing. Think of the profits you would have made if you had invested in Apple before it released its first iPhone, or in Amazon.com (AMZN) when it was just an online bookstore (Cabot Market Letter did!). Those are but two of the growth stocks our subscribers have profited from over the years. Others include Home Depot (HD), Cisco Systems (CSCO), eBay (EBAY) and Chipotle Mexican Grill (CMG).
Cabot Investing Advice began as strictly a growth investing service when it was founded in 1970. For nearly a half-century, we’ve been fine-tuning our investing for growth strategy via our flagship newsletter, Cabot Growth Investor.
For the most part, that strategy has worked. Those who have followed our growth recommendations from the beginning have doubled their money more than 29 times in the past 45 years!
Growth investing can be difficult. It’s never easy to identify the right growth stocks. That’s why we’re here to help steer you in the right direction—and help you profit.
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