Topic: Growth Stocks

23 top tips for successfully investing in TSX growth stocks

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TSX growth stocks can be more volatile—but they can make excellent long-term investments.

By definition, TSX growth stocks are companies on the Toronto Stock Exchange that have above-average growth prospects. They are firms whose earnings growth has been—or is projected to be—above the market average, and likely to remain above average. Some pay small dividends, but most don’t. Instead, they re-invest their cash flow in the business, to promote their growth. Examples of TSX growth stocks include CAE Inc. (TSX symbol CAE) and CGI Group (TSX symbol GIB.A).

Although TSX growth stocks can be highly volatile, they can also make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute:they will likely grow at higher-than-average rates within their industries, or compared the market as a whole.


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Below are 23 tips for investing in TSX growth stocks

1. For most investors in TSX growth stocks, you should limit your growth investment holdings to, say, 30% of your overall portfolio.

2. Always focus on investment quality first, especially when looking for TSX growth stocks that have the potential for higher returns.

3. Be wary of investing in growth stocks that have huge media hype. This also means downplaying stocks that are in the broker/media limelight.

4. To cut your losses, diversify the TSX growth stocks you invest in by investing in five or more stocks instead of just one. Gains on your winners should offset your losses.

5. If you’re investing in TSX growth tech stocks, begin by focusing on up-and-coming technologies—for example, smartphones have spurred on many new apps and network systems.

6. Look for growth stocks that are multi-product companies. Technological advances come in spurts, and tend to leapfrog each other.

7. Focus on growth tech stocks with a variety of existing or soon-to-be-released products, and avoid one-hit wonders.

8. Always review the balance sheets of the growth stocks you want to invest in.

9. When investing in growth stocks, always look at earnings. A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money,
it can stay in business and perhaps reap the bonanza of a new product.

10. While you are looking at balance sheets, look for hidden assets like real estate. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.

11. Another type of hidden value in TSX growth stocks is brand loyalty. Does the growth stock in question have a loyal following? Apple is the perfect example of a growth tech company that leveraged its loyal fan base to jump start the digital music revolution with the iPod.

12. Growth stocks are typically newer companies. Investors should remember that marketing is a lot easier than inventing a successful product.

13. Growth stocks can have an uphill battle when they first hit the market. Even a great new product or computer program may fail to overcome retailer and customer skepticism.

14. A growth stock’s acquisitions can bring “time-bomb” risk. Companies sometimes grow quickly by buying other companies. But sellers may simply want out of a losing situation. Growth by acquisition can work out, but it can also mean a waste of capital and time.

15. Junior growth stocks often trumpet their deals with major firms. Watch out for misleading press releases that exaggerate a small firm’s real association with a bigger company.

16. Be especially wary when growth tech stocks splurge on elaborate websites and glossy investor brochures, but take too long to produce any real results.

17. When investing in more speculative TSX growth stocks, use our “sell-half” rule. This says that if a stock you own has doubled, you should sell half so you get back your initial stake.

18. If you are too slow to sell speculative stocks in your growth portfolio, your profits, and even your principal, can evaporate all too quickly.

19. Most successful investors will hold a blend of growth stocks and some value stocks at any given time, depending on where they discover the best opportunities. Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Many technology stocks, for instance, start out as growth stocks and transition into value stocks.

20. Keep an eye on a growth stock’s debt. It should be manageable. When bad times hit, debt-heavy companies go broke first.

21. The best TSX growth stocks should have the ability to profit from secular trends: These trends outlast ordinary business booms and busts, because they reflect ongoing social change. An expanding global middle class and rising environmentalism are just two examples of secular trends.

22. Try to find TSX growth stocks that have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.

23. If you can find a growth stock that has freedom from business cycles, you’re in good shape. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify. Invest in utility, finance and consumer stocks, along with resources and manufacturers.

How do you pick the winners and losers for your growth stock portfolio?

Do you like to keep some growth stocks in your portfolio? What tips do you follow to spot a high quality growth stock?

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