For investors who do not mind taking a little risk and are already growing tired of the ins and outs of traditional investments, growth stocks are becoming attractive alternatives to pump the adrenalines of investment daredevils out there.
Growth stocks are any share in a company that is expected to grow at a rate significantly higher than the average market growth. Historically, they perform best when interest rates are falling and company earnings are on the rise. However, they become vulnerable when the economy begins to decline and the cheap money that can fuels fast growth becomes more difficult to find.
But despite the current state of economies, many growth companies managed to prosper and made it through various economic hurdles that the past two years presented. Case in point, Amazon (NASDAQ: AMZN) saw its stock price grow 65% from 2020 to 2021 to $2,008.72 from $3,313 at the height of the COVID-19 pandemic.
Just like any other investment, it does not automatically means that big risks would bring about big rewards. Managing growth stocks, after all, are all about risks, but these risks pay off as long as investment cards are played right.
Growth stocks generally do not pay dividends because their owners or investors are usually companies that plan to reinvest any earnings to further speed up their growth. This make the stocks risky investments because the only avenue for return is by selling the shares at the right time. Investors generally inject capital in growth stocks if they are more or less certain of capital gains once they sell the shares in the future.
Some common characteristics of growth stocks are they tend to have unique product lines. In order to stay ahead of competitors, these companies reinvest profits for the development of even newer technologies that they patent to guarantee longer-term growth. These companies usually also have a loyal customer base and a significant amount of market share in their particular sector.
Growth stocks are not exclusive to one sector, they cover various industries and are present basically worldwide.
In addition to Amazon, other growth stocks to have emerged in recent years include Apple (NASDAQ: AAPL) and Netflix (NASDAQ: NFLX).
The three best growth stocks in September 2022 in terms of EPS growth are American Airlines (NASDAQ: AAL), Marriott Vacations Worldwide (NYSE: VAC), and Equitable Holdings (NYSE: EQH). Each of their EPS grew 2,170%, 1,880% and 1,840% during the month.
In terms of sales growth, the best three are Coterra Energy (NYSE: CTRA) with a revenue increase of 693.8%, QuidelOrtho (NASDAQ: QDEL) with a 247.3% improvement in revenue and TD Synnex (NYSE: SNX) with its 160.7% sales hike.
It is not enough, however, to just look into the sales and earnings performances of growth companies. When choosing a growth stock to invest in, it is wise to also look for companies with competitive advantages, which during recent turbulent times marred with the pandemic and high inflation have been great identifiers of resiliency. Some of these advantages are network effects, scale advantages and high switching costs.