How to pick a growth stock?

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Australian Economy, Macro Economics

While picking a growth stock one should look at the expected price appreciation, with the target an investor may want to achieve. Such stocks might be trading higher than their intrinsic value but can still make big leaps going forward. Sometimes a stock with a substantial gain in a specific time frame (e.g. 15-20% gain or more in 6 months or a year) often signals towards a climax in price action representing the growth attained. What this boils down to is how to start screening and selecting such stocks.

The first step to actively picking out a stock from a pool is to determine the purpose of one’s investment in line with how one wants to shape up the growth portfolio. It’s difficult to find stocks with humongous growth potential while focusing on prices that merely offer cheap investments, rather than those with high price and still having a chance for rapid price appreciation. One should look for stocks with a sound trading volume which makes it easier to buy or sell the stock. A stock with growing potential and reducing costs will have expanding margins to yield better bottom line levels. For stocks that are linked to good growth projections, return on investment can continue over years; however, investing in an early-stage startup which is yet to emerge as a good growth stock, returns may come gradually.

The key things to look for will be whether earnings can grow above the average industry rate as growth companies believe in reinvesting the earnings into the business instead of paying dividends. Further, companies that operate in fast growing industries backed by solid technologies and services come under the spotlight, when investors look for companies with future potential. Thus, it becomes prudent to keep an eye on the industry the company belongs to as well as what are its historical and future (as indicated in statements) earnings trends. Another factor to look at is return on equity and a consistent or growing ROE reflects the efficiency of the business and that of the management to generate returns from investments made by the shareholders. While returns can be spectacular, the risk is nonetheless high, and investors need to be mindful of industry dynamics and competitive advantage a company has, to punt on for good returns.

One sector where investors usually look for growth is technology space. One example of the stocks pertaining to the technology sector is Nearmap that has risen 75% in last one year and 278% in last five years (as at April 18, 2018). Given its record growth and new suite of imagery products, the stock is expected to witness more momentum going forward. Then Xero is another stock in the sector that has risen about 265% in last five years.

A diverse stock expected to benefit from its recent moves is BWX, which is a small-cap that is regaining growth potential in the past few months and is expected to grow based on expansion of business relating to its Sukin range of skincare and personal care products, with strong momentum already seen in Australian business. The opportunities are expected to be paved by expansion in the UK, China and other geographies. BWX has been up 11% in last five days post a 36.2% downfall of last three months.


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