Next Big Thing To Invest In 2021

Investing in Growth Stocks

Past Adam Levy – Updated December 19, 2022 at two:41PM

Investing in growth stocks can be a dandy way to earn life-changing wealth in the stock market. The key, of course, is to know which growth stocks to purchase — and when.

Many growth stocks have been routed through the first one-half of 2022. While the
S&P 500 index
crashed about twenty%, the S&P 500 Growth index fell 28% through the commencement half-dozen months of 2022. Some growth stocks savage much more, with stock prices cut past half or two-thirds. If yous tin can identify a growth stock with strong fundamentals, now could be a keen opportunity to invest.

To help you lot go started, here’southward a handy guide to growth investing. With these tools and strategies, you’ll be able to position your portfolio for long-term success with growth stocks.

What is a growth stock?

Growth stocks are companies that increment their revenue and earnings at a faster rate than the average concern in their industry or the marketplace as a whole. Growth investing, even so, involves more than than picking stocks that are going upwards.

Oftentimes, a growth visitor has developed an innovative product or service that is gaining share in existing markets, entering new markets, or even creating entirely new industries.

Businesses that can grow faster than boilerplate for long periods tend to be rewarded by the market, delivering handsome returns to shareholders in the process. And, the faster they grow, the bigger the returns can be.

Unlike value stocks, high-growth stocks tend to exist more expensive than the average stock in terms of profitability ratios, such as price-to-earnings, price-to-sales, and price-to-free-greenbacks-flow ratios.

Despite their premium price tags, the best growth stocks tin can still deliver fortune-creating returns to investors as they fulfill their awesome growth potential.

That said, growth stocks have taken a beating in the marketplace in 2022. High inflation has put pressure on growth stocks since information technology reduces the future value of their expected earnings. Additionally, supply chain constraints accept impacted the ability of some to scale, while other macroeconomic factors impact the entire economy. Simply the downturn may requite long-term investors a ownership opportunity while growth stock prices are depression.

Did You Know…

Growth stocks are companies that increase their acquirement and earnings faster than the average business in their industry or the market as a whole.

Smashing growth stocks

To provide you with some examples, here are 10 excellent growth stocks available in the stock market today:

Data sources: Morningstar, YCharts, company quarterly fiscal reports. Data authentic as of Baronial eight, 2022. (CAGR = compound annual growth rate.)
Company 3-Year Sales Growth CAGR Manufacture
Tesla (NASDAQ:TSLA) 40% Automotive
Shopify (NYSE:Shop) 52% Due east-commerce
Block (NYSE:SQ) 56% Digital payments
Etsy (NASDAQ:ETSY) 48% E-commerce
MercadoLibre (NASDAQ:MELI) 63% E-commerce
Netflix (NASDAQ:NFLX) 18% Streaming amusement
Amazon (NASDAQ:AMZN) 22% Eastward-commerce and cloud calculating
Meta Platforms (NASDAQ:FB) 22% Digital advertising
Salesforce.com (NYSE:CRM) 21% Deject software
Alphabet (NASDAQ:GOOG), (NASDAQ:GOOGL) 22% Digital advertising

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As this list shows, growth stocks come in all shapes and sizes. They can be found in a variety of industries, both inside the U.S. and in international markets. And, although all the stocks on this list are larger businesses, smaller companies tin exist fertile basis for growth investors, too.

A great mode to invest in a broad variety of small-cap growth stocks is via an commutation-traded fund (ETF) such as
Vanguard Small-Cap Growth ETF
(NYSEMKT:VBK). This fund tracks the performance of the CRSP Us Small Cap Growth Index, which gives investors an easy way to invest in roughly 580 small-cap growth companies all at in one case.

Importantly, the Vanguard Modest-Cap Growth ETF has an ultra-low expense ratio of 0.07%. This means investors volition receive almost all of the fund’south returns, with just a small amount in fees going to Vanguard. (An almanac expense ratio of 0.07% equates to only $0.seventy in fees per $ane,000 invested per yr.)

How to notice growth stocks

To find peachy growth stocks, yous’ll need to:

  1. Identify powerful long-term market trends and the companies best positioned to profit from them.
  2. Narrow your list to businesses with strong competitive advantages.
  3. Further narrow your list to companies with large addressable markets.

An infographic listing criteria for how to find the best growth stocks on the market.

Image source: The Motley Fool

Identify trends and the companies driving them

Companies that tin can capitalize on powerful long-term trends tin can increase their sales and profits for many years, generating wealth for their shareholders forth the way.

The COVID-xix pandemic accelerated many trends that were already well underway. Here are some examples, along with the companies that can assist y’all profit from those trends:

  • Eastward-commerce
    :
    Equally more people shop online, Amazon, Shopify, and Etsy are well-positioned to profit within the U.S. (and many international markets). MercadoLibre holds a leading share of the online retail market in Latin America. While consumers accept started to render to physical stores in 2022, due east-commerce still has tons of growth potential as an industry.
  • Digital advertizement:
    Meta (formerly Facebook) and Alphabet ain the lion’s share of the digital advertising marketplace and are poised to profit handsomely as marketing budgets shift from TV and impress to online channels. Amazon has congenital a massive advertisement business, which continues to expand into new formats. Fifty-fifty Netflix is starting to come effectually to advertising as a way to increase its subscriber base and boost its revenue.
  • Digital payments:
    Cake (formerly Square) is helping to accelerate the global shift from cash to digital forms of payment by assuasive businesses of all sizes to accept debit and credit card transactions.
  • Cloud computing
    :
    Computing power is migrating from on-premise data centers to cloud-based servers. Amazon and Google’s cloud infrastructure services help make this possible, while Salesforce.com provides some of the best cloud-based enterprise software available.
  • Cord-cutting and streaming entertainment:
    Millions of people are canceling their cable subscriptions and replacing them with less expensive and more user-friendly streaming options. Every bit the global leader in streaming entertainment, Netflix offers a great way to profit from this tendency, only it does face growing competition from other media companies.
  • Remote work:
    For many organizations, remote work arrangements became a necessity during the pandemic. Studies indicate that the remote work trend will continue well after the pandemic is over as companies realize the financial efficiencies and workforce benefits associated with flexible working arrangements.
  • Electric vehicles: The world is shifting from its reliance on gasoline to using electricity to ability vehicles. Half of all auto sales could be EVs by 2030, co-ordinate to a survey of industry executives. Tesla is the leader in the space with its lineup of vehicles and its bombardment engineering science.

The cardinal is to endeavor to invest in these types of trends and companies as early as possible. The earlier you get in, the more yous stand to profit. Still, the most powerful trends can last for many years and even decades, giving you plenty of time to claim your share of the profits they create.

Did y’all know…

In 2022, the market has seen many neat companies’ share prices plummet. During times when the unabridged market is downwards, growth investors pay close attending.

Prioritize companies with competitive advantages

It’s also of import to invest in growth companies that possess strong competitive advantages. Otherwise, their competitors may pass them by, and their growth may not last long.

Competitive advantages get especially important during turbulent times such every bit the pandemic or periods of high aggrandizement. A potent competitive reward will help companies survive and thrive through market place downturns, while those without a competitive advantage will struggle.

In fact, the starting time of 2022 saw a big sell-off in many tech-focused growth stocks. Many share prices of top growth stocks were slashed by more than than l%. If you can identify stocks of companies with potent competitive advantages that are being sold off along with the remainder of the market place, information technology could be an opportunity to generate massive returns as they recover.

Some competitive advantages are:

  • Network effects:
    Meta’southward Facebook is a prime number example hither. Each person who joins its social media platform makes it more valuable to other members. Network effects can make it hard for new entrants to displace the current market share leader, and Facebook’s 2.ix billion users certainly arrive unlikely that a new social media company will readapt it.
  • Calibration advantages:
    Size tin be some other powerful reward. Amazon is a great instance in this category because its massive global fulfillment network is something its smaller rivals will find extremely difficult to replicate.
  • High switching costs:
    Switching costs are the expenses and difficulties involved in switching to a rival product or service. Shopify — which serves as an online retail system for more than 1 meg businesses — is a perfect example of a business concern with high switching costs. One time a company begins to use Shopify as the core of its online operations, it’southward unlikely to go through the hassle of switching to a competitor.

Related investing topics

Detect companies with large addressable markets

Finally, you’ll want to invest in businesses with large addressable markets — and long runways for growth notwithstanding ahead. Industry reports from research firms such as
Gartner
(NYSE:Information technology) and eMarketer — which provide estimates of manufacture sizes, projections for growth, and market share figures — can be very helpful in this regard.

The larger the opportunity, the larger a business organisation can ultimately become. And, the earlier in its growth cycle it is, the longer information technology can proceed to grow at an impressive rate.

Skillful Q&A on Growth Stocks

The Motley Fool: What’southward your best advice on finding high potential stocks similar growth stocks?

Dr. Cherry:
Because growth stocks tend to operate in a growth business wheel or business sector, finding high potential growth stocks should contain metrics that try to confirm or back up current growth and best signal sustainable growth patterns. One important feature of a growth company is to inquire, “do they possess a unique business service or product in their sector that provides a valuable moat?” This service or production is the lifeline of growth where the visitor needs to market, produce, evangelize, and protect better than competitors and new entrants. Operation metrics to consider are whether the company shows historical increases in earnings over select periods and profit margin analysis, which illustrates how a company tin can manage costs and increase revenues. Other analysis considerations are the technical chart trend characteristics and experienced market place analysts’ forward growth and price projections.

The Motley Fool: Are growth stocks risky?

Dr. Cherry-red:
Investing in individual stocks, in general, contains risk factors such as overall market take chances and business chance, amid others. The characteristics of growth stocks can make them
riskier
than their value stock counterparts. As their name suggests, growth stock companies tend to be in a
growing
business phase. The growing stage could consist of younger and smaller companies with an unproven production or entity track record that tend to use much of their revenues and raised capital to
grow
the business. These growth characteristics, amid others, tend to make growth stocks riskier through higher stock price volatility or reactions to market, company, economic, and political risks, to name a few, thus more meaning exposure to downside stock price pressure. Notwithstanding, as investors should avail themselves of the downside cautions of growth stock risk, the upside potential should also be considered. With additional risk comes the prospect of added returns. Because growth companies have the potential for higher company growth rates, growing from before business stages to mature business stages, growth stocks could potentially experience college returns over shorter fourth dimension horizons. Above all, investors should consider their risk tolerance, capacity, portfolio allocations, and goals to have the college take a chance of growth stocks.

The Motley Fool: How do yous tell the difference between a growth vs. value stock?

Dr. Cherry:
Growth and value stocks tend to differ in a few areas, such equally company size, business phase, and revenues to return gains to the shareholder. Growth stocks tend to be in the emerging markets or small or mid-cap visitor size areas whereas value stock companies tend to be large-cap. The size of companies tends to be the lens of what business organization stage a company resides. Growth stocks tend to be in the early to mid-business stages, the growth stages (although a small segment of large companies tin be growth companies too), and value stock companies tend to be larger, more mature business phase companies. The value stock companies tend to exist trading at a discount, “on-sale,” or a premium, “overvalued,” to their valuation, thus their name, finding
value.
Growth stock companies tend to reinvest their earnings dorsum into the visitor and return value to shareholders solely through stock price appreciation. In comparison, value companies may return earnings to investors through a dividend, representing income to an investor and complements stock price appreciation. This income and stock toll appreciation mean a total return approach.

The Motley Fool: How do you tell the divergence between a growth vs. value stock?

Dr. Stewart:
The Gordon valuation model is an fantabulous tool to illustrate the difference between growth and value stocks. Professor Gordon’s model, with some simplifying assumptions, shows that stock prices equal next year’southward earnings (e) divided by the expression r – g, where “r” is a disbelieve rate and “chiliad” is a growth charge per unit. For the same stock price, a lower growth rate necessitates a higher earnings number. Conversely, (illustrated past dividing both sides past e) a high-p/east stock is associated with a loftier growth rate. Of course, these numbers reverberate investor expectations.

Investors bid upwards the p/e ratios of some stocks because, despite low current earnings relative to their market values, they expect earnings to grow at loftier rates. These are traditionally defined every bit growth stocks. Tesla stock is a expert example of a growth stock, with its 154 p/e multiple and 73% earnings growth rate (using Yahoo Finance data).

The Motley Fool: Are growth stocks risky?

Dr. Stewart:
Note that a company’due south risk is embedded in its discount charge per unit “r.” As a upshot, companies with stable earnings will justify higher p/e multiples than ones with volatile earnings, other things equal. Clorox, a large-cap, stable-earnings company with only small-scale growth expectations (basically 0% using Yahoo Finance data) yet justifies a p/eastward of 30 (using next fiscal year’s earnings).

Empirical evidence suggests that high-growth stocks underperform low-growth, low-p/east “value” stocks over the very long term. For example, the Russell minor-cap Value index yielded roughly iii% a year higher than its Growth peer over the forty years ending 2019, and at lower return volatility. One explanation is that investors over-gauge the sustainability of loftier-growing companies since these “glamour” stocks subsequently fail to evangelize on those high expectations. However, at that place tin can be long periods in which growth stocks outperform, such every bit the 10 years ending 2020.

The theory and show suggest that the key to picking good growth stocks is to place the ones whose earnings growth rates will advance in the short term (increasing the p/east and toll) and not disappoint in the long term (sustaining east growth and maintaining a high p/e). For value stocks, some practitioners propose picking companies that investors take given upwardly on (ones with very low-p/due east or other multiples if eastward is less than zero), that won’t neglect in the short-term and volition recover in the long-term. Not easy tasks!

John Mackey, CEO of Whole Foods Marketplace, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet, Amazon.com, Netflix, and Salesforce. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Cake, Etsy, MercadoLibre, Netflix, Salesforce, Shopify, Tesla, and Vanguard Index Funds – Vanguard Small-Cap Growth ETF. The Motley Fool recommends Gartner and recommends the following options: long Jan 2023 $one,140 calls on Shopify and curt Jan 2023 $one,160 calls on Shopify. The Motley Fool has a disclosure policy.

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Source: https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/

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