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How Growth Investing Can Be Profitable for Investors

07 Mar 2022

How Growth Investing Can Be Profitable for Investors | VI

Investing is not as simple as it appears to be. As an investor, you should be aware of the different strategies or styles you can follow as you seek to profit from the stock market.

There’s no one-size-fits-all strategy in investing since we all have our own goals. What works for your entrepreneur friend might not work for you and your colleague.

In this article, we’ll tackle one strategy in investing that seems to be picking up traction within the community – growth investing. What it is and how you can adopt this style, we’ll go through in detail below.

Growth investing explained

What is growth investing? | VI

When you search for “growth investing,” you’ll always come across an explanation of how it differs from the other popular strategy, which is value investing.

So in case curiosity is eating you up, we’ll differentiate between the two. But first, know that BOTH strategies look for good stocks to invest in. The key difference lies in what types of good stocks they put heavier weightage on.

While value investing seeks to find stocks that are trading for less than their actual value (hence, “value” investing), growth investing is on the lookout for stocks perceived to have higher growth potential (hence, “growth” investing).

Now let’s go back to growth investing. Growth investors (or those who follow this strategy) primarily aim to increase their capital. Hence, they invest in stocks that are anticipated to grow at a faster rate than their peers in the industry.

Typically, small and emerging companies are what growth investors look at. For them, growth investing opportunities lie in stocks whose underlying companies are at the forefront of innovation.

See also: Best Metaverse Stocks Roundup 2022

For example, Amazon is a popular growth-oriented company that investors have their eyes on. Even though it is not as old and established as other companies, Amazon is considered a trailblazer in the e-commerce space. And we can just look around to see how fast the growth of this company has been.

There are a lot of other growth stocks that could provide you opportunities to invest, although investing in these stocks DO NOT guarantee profits.

Why do we say so?

It’s because we can’t change the fact that the stock market is volatile. Plus, as these growth-oriented companies are relatively small, we don’t have a way to predict whether or not they will continue to grow in the next couple of years or so.

Likewise, we must face the fact that the digital age also means innovation can move at an insanely fast pace that products and services can easily become outmoded.

Still, we also should not discount the fact that growth investing can give us huge returns. You can do growth investing both for your short-term and long-term goals. The prerequisite, however, is to have a thorough understanding of how to choose the best growth stocks to buy.

Choosing growth stocks

How to choose growth stocks | VI

If you intend to include growth stocks in your investment portfolio, there are some things you should remember when evaluating which ones to buy.

Remember that growth investing does not end with just looking at whether the company is a trendsetter in its industry. While there’s no formula to really assess a company’s growth potential, there are certain criteria you can check.

1. Look at the management

If you know your stuff as an investor, you’d know how looking at the company’s management is crucial in making investment decisions. We know it would seem too minor a detail for some, but who comprises the management should not be overlooked.

Think about it this way. Would you send your kids to a school whose management doesn’t know a thing about education and doesn’t have a good vision of the kids’ future?

See also: Top 3 Things Investors Look For in a Company

A company’s management is also like its ship captain. They steer the boat in the direction they believe is the safest yet the fastest. And because growth investing is all about stocks that are keen on increasing their profits at an above-average rate, the management plays a key role in whether the company can fulfil this goal.

Hence, in searching for growth investment opportunities, a non-negotiable should be a company led by an innovative team. You may want to use Steve Jobs as a benchmark for this criterion.

2. Check the profit margins

Growth investors do growth investing because they want to ride on the growth momentum of promising companies. Assessing a company's profitability demands you to look at the profit margin.

The profit margin refers to the percentage of company sales that have been turned into profits. So if a company’s profit margin, for example, is 45%, it would mean that the company got a net income of $0.45 per dollar of sales.

In growth investing, you would want to consider companies with rising profit margins. In fact, this metric is also a helpful way to gauge the overall financial health of a company, as it tells you how profitable the business can be.

3. Review the sales growth

This one is a no-brainer. You want to invest in companies that are aggressively growing, hence, what’s a better measure than their sales growth?

Take a look at the company’s historical earnings and revenue growth. Are the numbers consistently growing?

Typically, companies with a high double-digit growth hold a lot of promise for growth investors. When a company’s growth rate is sustained at a high rate, the share price will likely increase, too, as investors will be attracted to it.

4. Calculate the return on equity

Another good criterion in assessing growth stocks is the return on equity (ROE). It is a reflection on whether the company is highly efficient in generating profits.

You would want to choose companies with strong ROE (or high and increasing) as it would mean they are using shareholders’ equity more efficiently to generate more returns. This then translates to a company’s overall profitability. And you would want to invest in that kind of company, wouldn’t you?

5. Check the market

Growth stocks are often those that set market trends as they are highly innovative, hence, justifying their growth potential. So, it’ll be helpful if you are aware of the current trends so you can look at relevant companies that would fill the gap.

For instance, the pandemic started a trend where Netflix, Zoom, and Amazon saw an opportunity to enter. And this led to an increase in their share prices. This is exactly what happens when industry leaders arise to fulfil the customers’ needs for new services and products.

Of course, you must also check if the company has a strong moat or competitive advantage. It can’t be a case where the company is just profitable this year but might no longer be existent the next year.

To profit from the stock market, whether you’re following growth investing or other strategies, is never a smooth and easy path to take. There’ll be a lot of puddles, distractions, and even traffic jams.

Set your eyes on the goal, gas up with proper knowledge, and be confident you can reach your destination.

Interested to know more tips on choosing the best stocks in the market today? Come to our free investing masterclass.

DISCLAIMER

This article and its contents are provided for information purposes only and do not constitute a recommendation to purchase or sell securities of any of the companies or investments herein described. It is not intended to amount to financial advice on which you should rely.

No representations, warranties, or guarantees, whether expressed or implied, made to the contents in the article is accurate, complete, or up-to-date. Past performance is not indicative nor a guarantee of future returns.

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