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How to Pick the Best High Growth Stock in the Next 12 Months
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Characteristics of Best High Growth Stocks
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Your investment or lack of investment strategy plays a huge role in your profitability. One of stock investors' most common strategies is the growth investing strategy.
If you are searching for stocks with incredible growth potential, you are looking for stocks with the following features and characteristics.
1. Strong Leadership Team
A strong leadership team is one of the most popular attributes of high-growth stocks. Growing a corporation requires an innovative and creative set of leaders, without which growth might not happen.
Growth corporations focus on boosting their profits and sales; therefore, the capacities and foresight of the management and executive team are vital.
Potential growth investors looking for their next investment should consider companies with managers and companies with proven track records for success and their mission for where they wish to take their corporation.
For example, Bill Gates and Steve Jobs are good examples of creative and innovative founders.
You can also research the leaders' records before joining the company since most growth companies are young without any significant history to share.
Similarly, you can also examine the leadership team to identify the capacity of the team members.
This will help eliminate potential risks!!
2. Revenue Growth
It is also essential that the high-growth stock you wish to invest in has a track record of excellent revenue growth.
To determine whether the stock's revenue is growing, look at the firm's last four quarterly earnings statements or reports.
Then, look at the amount of income reported every quarter while keeping in mind the valleys and average peaks in the sector.
For instance, tech corporations often tend to perform well during the holidays, leading to impressive fourth-quarter revenue.
However, corporations within this space may experience a plateau or surge in revenue, or even slight reductions, from the fourth to the first quarter, which is generally accepted since the revenues sequentially increase throughout the remaining parts of the year.
It is, therefore, crucial to ensure that the stocks you wish to purchase are witnessing consistent revenue growth together with other vital metrics.
You can use stock screeners such as Stock Rover and Trade Ideas to discover companies that meet or even exceed your requirements for criteria like earnings per share, revenue growth, and other essential metrics.
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3. Fair Valuation
High growth stocks are notorious for attaining significant overvaluations following a big run, leading to dramatic declines after investors take profits and proceed to the next opportunity.
While it is vital to expect an average valuation, risk levels also increase when the prices fly way too high.
One of the best techniques to determine if the stock is overvalued, fairly valued, or undervalued is to look at the P/E ratio or price-to-earnings ratio.
This metric is typically used by investors searching for value stocks, and it compares the price of a stock to the earnings per share the company gets over one year.
Each industry has its average ratio. By comparing the ratio of the stocks that you wish to purchase to that of the industry it operates, you will be able to determine if the present value of the stock is fair or otherwise.
4. Market Growth
Another characteristic or attribute of a high-growth stock is market growth.
The key to growth investing is discovering a stock that has sustained growth across every metric, but the stock and firm it represents are not the only factors to consider.
Growth in the market the company you are interested in targets is also essential to its capacity to realize sustained gains in earnings, revenue, and most importantly, share price.
At some point, the firm will saturate the market and eventually plateau itself.
Therefore, it is crucial to consider the market data to determine if the market the company operates is growing and can support continued upward mobility in the stocks you wish to purchase.
To do this, go to your chosen search engine, type in "(industry) market size" into your search bar, and go through the search results.
In most instances, statistics companies would have carried out a detailed analysis of the market, determining the present market size and the anticipated size of the market over the next years.
5. Stock Price Growth
For a particular stock to qualify as a high-growth, it must be undergoing growth in its share price. Stocks that do not have a price appreciation cannot be considered high-growth stocks or have the potential for high growth.
How then can you determine if a stock is experiencing an upward trend? The most straightforward way to do this is to look at the stock chart.
- Consider the 3-Month and 1-Year Stock Charts: You will discover if a stock is trending upward or declining by looking at the stock chart. If the share prices of the stock have experienced relatively consistent upward mobility, then there is a big chance you are looking at a high-growth stock.Therefore, it is vital to look at the chart over the last three months and one year.The 3-month chart will let you discover if the trend is presently upward, while the one-year chart will let you know whether the stock's growth has been sustained over a significant period.
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Contrast the growth to the S&P 500: The S&P 500 index is one major benchmark of the US market. By comparing the growth of the stock that you are interested in over the last three months and one year in the S&P 500, you will be able to infer whether the firm's stock price has performed in line, outperformed, or underperformed in the broader United States market. After all, your aim is to discover high-growth stocks that outperform the market returns.
- Forgive the Dips: Even in the bull markets, stocks experiencing an upward surge will eventually dip from time to time as the investors take earnings or consume pieces of news. What you are searching for is the overall performance of the stock in the upward trajectory while ignoring short-term dips.
After looking at the charts and discovering that the stocks you are interested in have outperformed Wall Street averages across the last three months and one year, you have landed yourself a golden opportunity to invest your dollars.
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Steps on How to Pick the Best High Growth Stocks
In today's global financial market, evaluating large amounts of data to make an investment decision can be challenging.
High-growth stocks are renowned for their promising positions in emerging markets with the potential for future expansion and increase in value over time.
Selecting a high-growth stock involves choosing equities based on specific established criteria with hopes of attaining positive returns in the long run.
Step 1. Start by Preparing Your Finances
It is a general rule of thumb that you only invest with disposable cash, not money you may require for your vital needs.
Also, avoid purchasing stocks with the cash you will need within the next five years at least.
This is because while the stock market generally rises over the long term, it will constantly post sharp drops of 10%, 15%, 20%, or more without any warning.
One of the worst positions you can find yourself as an investor is having to sell stocks during the down periods to recover funds for urgent needs.
Ideally, purchasing stocks when others are selling theirs is conventionally advisable.
Finally, only invest with sums you are willing to part with and be mindful of your appetite for risk.
The amount of funds you should invest comes down to the number of shares you want to buy and their prices.
Keep in mind how much you might need to spend to diversify your portfolio properly.
If you cannot purchase your desired high-growth stock in whole, you can explore the options of fractional shares.
Fractional shares enable you to purchase fractions or parts of a stock.
For example, if a high-growth stock is valued at $500, you can purchase %100 worth of the stock, giving you a fraction of the share worth 20%.
Most online brokers like Robinhood and Fidelity render fractional share services.
Step 2. Open a Brokerage Account
Stocks are purchased and sold on stock exchanges; however, you can also purchase the stocks directly from the company.
Establishing a taxable brokerage account is crucial to obtaining access to the marketplace.
Brokerage accounts are comparable to bank accounts, except that they are employed for buying and selling securities.
Select a provider and open an online account; after that, move some money into it and proceed to purchase your high-growth stocks with a few clicks.
There are several licensed brokers to pick from, and your choice of a broker is based on your priorities and needs. There are three key options to consider when choosing a broker:
- Full-Service Brokers: Conventional full-service brokers provide different services ranging from research to advice and tax assistance, estate planning, retirement planning, access to Initial Public Offering (IPO) shares, and lots more. Due to this, they mainly cater to affluent clients who can take on high account charges.
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Discount Brokers: Discount brokers allow you to make your own decisions. They traditionally trade on behalf of their clients but also render specialized investing advice. Investors prefer them for their affordability.
- Robo-Advisors: These are AI automated investing platforms that pick and manage investments on behalf of clients according to their timeline and goals by following a passive investing technique that invests their money in index funds or inexpensive ETFS
Once you set up your brokerage account, you can access analytical and research that aids you in your investment decision.
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Step 3: Research and Select the High Growth Stock You Wish to Purchase
The stock market comprises thousands of publicly traded corporations and companies with various stock offerings.
The most common industries for high-growth stocks include streaming, entertainment, cloud computing, e-commerce, digital advertisement, etc. As such, picking stocks from companies within such industries is advisable.
Given the vast number of companies offering stocks, you can easily get overwhelmed.
This is why it is recommended to start with companies and industries that interest you and which you have a healthy understanding of their activities.
The best place to commence is by looking at the company's annual report, also known as the Form 10-K. This document provides a comprehensive overview of the firm's financials.
Depending on what you wish to gain from the stocks, you can purchase dividend stocks if you want a steady inflow of income.
High-growth stocks are suitable for persons with a high-risk tolerance and an appetite for curiosity.
Finally, you can include value stocks in your portfolio if you are looking for companies with under-priced stocks, hoping they will experience a growth spurt and outperform the stock market in the long term.
While you may access some healthy research materials, you also need to make your conclusions. Below are some valuable tips to keep in mind while building your portfolio:
- Diversify Your Portfolio Holdings: Even if you are starting out small, it is vital to think about portfolio diversification. This means having a variety of investments across and within asset classes to guard against and lower the risks of volatility.
- Think Long-Term: Long-term investing in high-growth stocks is the safest way to invest, except if you are looking to constantly trade and make a quick profit. High-growth stocks are renowned for their potential and ability to outperform the market during a period.
- Be Mindful of Taxes: Select tax-favored high-growth investment stocks and aim to capitalize on their long-term capital gains tax treatment by holding on to them as long as necessary.
Step 4: Implement Trades and Select Your Order Type
After performing the steps mentioned above, including outlining your strategies and goals and conducting research on which high-growth stocks to invest in, then it is time to act. Stock trading takes place on exchanges such as the Nasdaq and the NYSE.
Before purchasing a high-growth stock, choosing an order type that informs the buying process is vital. There are two major options when executing trading using a brokerage account:
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Limit Orders: A limit order helps specify your order's particular prices. The order can only be performed if a seller agrees to part with them at your approved price. Limit orders give investors more control over the price they pay for their stocks or security.
- Market Orders: These categories of orders inform the broker to buy the security or stock instantly, without guaranteeing the price. Market orders are more popular than limit orders and are used primarily for high-growth stocks with long-term potential.
You can place an order for a stock by navigating to the part of the brokerage platform that provides for stock orders.
After placing your order, your portfolio will be instantly updated to display your recently acquired stocks.
Always remember that stocks come with risks, and observing a buy-and-hold method will enable you to safeguard against volatility.
Step 5: Maximize Your Returns
High-growth stocks are known for their volatility tendency, and while you may wish to hold your stocks for several years, it is also vital to keep an eye on the major changes in pricing for some notable reasons.
- Suppose a part of your portfolio holdings has acquired so much value that it dominates your whole portfolio. In that case, it is recommended to rebalance your portfolio to lower the risks of exposure.
- If the firm is witnessing a rough patch that has broken your initial investment projections or compromised the reasons you originally bought the stocks, you might wish to sell your stocks. Broken forecasts on stocks can be caused by significant missteps by the management team, disruption by the emergence of a lower-priced competitor, or a long-term decline in their pricing capacity.
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If the high-growth stocks rise way above the original estimates of their value, you can consider selling them, especially if there are other valuable stocks to focus your funds on.
These are some of the techniques investors employ to make adjustments to their portfolio while also maximizing profits.
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Aside from the steps discussed above, investors looking to take advantage of high-growth stocks can also use the fundamental analysis technique.
Fundamental analysis is focused on estimating the intrinsic value of the stock.
This means that potential investors should evaluate the qualitative and quantitative sectors of the economy, the individual companies making up the industry, and the industries that comprise the economy.
The qualitative factors to consider include the following:
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Financial Events
- Company News
- Personnel Changes
Financial Events
Taking note of financial occurrences while selecting high-growth stocks is crucial because these can lead to heightened volatility and market uncertainty.
Economic events include scheduled changes in management, large-scale geopolitical occurrences like the present Russian-Ukraine war, and interest rate decisions.
Company News
News linked to the company or corporation you are looking to invest in could lead to stock prices rising or tumbling.
Good news causes people to purchase stocks, while bad or negative news makes them sell their stocks.
These activities impact demand and supply and, ultimately, the prices of the stocks
Personnel Changes
Changes in personnel, such as management restructuring, are crucial while searching for high-growth stocks to invest in because they impact the market's perception.
The firm's reputation can be negatively affected by personnel changes, all of which have a direct influence on the stock prices.
Quantitative Factors
Quantitative factors to consider include:
- Balance Sheets
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Dividends
- Earnings Releases
Balance Sheets
The company's balance sheet lists all its assets and liabilities.
Earnings directly impact prices. The stronger and healthier the balance sheet, the stronger the stock prices since it reflects the earning potential.
Dividends
Dividends are the aspects of a firm's profits that it selects to return to its shareholders.
Dividends can be used as a deciding factor in picking high-growth stocks because they establish the profitability of a company and the likelihood of good returns.
There are one of the major ways stakeholders earn cash from their investments without needing to sell their stocks or shares.
Earnings Releases
Investors can also utilize the company's releases on their earnings while selecting a high-growth stock.
If the company's earnings decline without a corresponding decline in the stock price, then the price may not reflect true or fair value.
Must-Have Metrics for High-Growth Stocks
High-growth stock investors use financial ratios to assist them in evaluating a given stock's potential.
Investors looking to take advantage of high-growth stocks make use of key investment metrics that help them find valuable high-growth stocks that are undervalued in the market.
Investors that employ these metrics believe that due to the shifting nature of the stock markets, certain stocks are prone to be undervalued due to reactions to negative and positive stock news.
Outlined below are popular financial metrics utilized by high-growth stocks investors:
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1. Price-to-Earnings Ratio:
The price-to-earnings ratio, also called the P/E ratio, is a financial metric that allows investors to determine a stock's market value in relation to the company's earnings.
The price-to-earnings ratio defines what the market is capable of paying for a stock according to its past and future earnings.
The price-to-earnings ratio is crucial because it offers a measuring yardstick for comparing whether a high-value stock is undervalued or overvalued.
A high price-to-earnings ratio means that the stock's price is expensive compared to its earnings and potentially overvalued.
In contrast, a low price-to-earnings ratio indicates that the present stock price is low or cheap relative to its earnings.
2. Price-to-Book Ratio:
2. Debt-to-Equity Ratio:
2. Free Cash Flow:
Free cash flow or FCF is the money or cash made by an organization from its operations minus the cost of expenditures.
It is the cash left after the company pays its capital expenditure (CapEx) and operating expenses.
It shows how effective and efficient a firm is at raising cash.
It is a vital metric for determining if an organization has sufficient cash after financing its capital expenditure and operations expenses to pay its shareholders through share buybacks or dividends.
FCF indicates to high-growth investors that earnings might increase in the future or otherwise.
If a firm has rising free cash flow, it might be due to sales, revenue growth, or cost reduction.
Therefore, rising free cash flow could reward future investors, which is why most high-growth investors cherish FCF as a measure of value.
2. PEG Ratio:
The PEG ratio, also called the price-to-earnings-to-growth ratio, is an advanced form of the P/E ratio that considers earnings growth.
However, the PEG ratio does not always tell whether or not the ratio is ideal for a firm's forecasted growth rate.
The PEG ratio measures the link between the earnings/price ratio and earnings growth.
The price-to-earnings-to-growth ratio offers a more comprehensive picture of whether a high-growth stock's price is undervalued or overvalued by evaluating the current earnings and the anticipated growth rate.
The PEG ratio is a critical metric for high-growth stocks investors because it offers a future-looking perspective on the stocks.
Conclusion
High-growth stocks are great investment options that provide you with the likelihood of long-term investment returns.
This is why it is essential to consider their vital characteristics and steps in picking high-growth stocks like those discussed above.
While there is tons of information regarding high-growth stocks, it is critical to have a strong understanding before proceeding with any investment action.
Resources and References:
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Attributes of High Growth Stocks
https://www.moneycrashers.com/best-growth-stock-characteristics/
https://www.investopedia.com/articles/investing/010616/5-characteristics-good-growth-stocks.asp
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Steps on How to Pick the Best High Growth Stocks
https://www.investopedia.com/articles/basics/11/how-to-pick-a-stock.asp
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/trade-order/
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Selecting High Growth Stocks Using a Fundamental Analysis Techniques
https://www.ig.com/en/trading-strategies/how-to-pick-stocks-190926
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*This manual is for informational and entertainment purposes only. The author is not an investment adviser, financial adviser, or broker, and the material contained herein is not intended as investment advice. If you wish to obtain personalized investment advice, you should consult with a Certified Financial Planner (CFP). All statements made in this manual are based on the author's own opinion. Neither the author or the publisher warrants or assume any responsibility for the accuracy of the statements or information contained in this manual, and specifically disclaims the accuracy of any data, including stock prices and stock performance histories. No mention of a particular security or instrument herein constitutes a recommendation to buy or sell that or any security or instrument, nor does it mean that any particular security, instrument, portfolio of securities, transaction or investment strategy is suitable for any specific individual. Neither the author or the publisher, can assess, verify, or guarantee the accuracy, adequacy, or completeness of any information, the suitability or profitability of any particular investment or methodology, or the potential value of any investment or informational source. READERS BEAR THE SOLE RESPONSIBILITY FOR THEIR OWN INVESTMENT DECISIONS. NEITHER THE AUTHOR OR THE PUBLISHER IS RESPONSIBLE FOR ANY LOSSES DUE TO INVESTMENT DECISIONS MADE BASED ON INFORMATION PROVIDED HEREIN. At the time of writing, neither the author or the publisher has a position in any of the stocks mentioned in this manual. By proceeding with reading this course, you affirm that you have read and understand the above disclaimer.
Disclaimer - Forex, futures, stock, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using the methodology or system or the information in this presentation will generate profits or ensure freedom from losses.HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.