Discover 11 key characteristics of growth stocks worth investing in and learn also what to avoid
We generally feel that most investors should hold the bulk of their investment portfolios in securities from well-established companies. This generally means holding a total of 10 to 20 well-established, dividend-paying stocks that have earned our “Average” rating or higher. It also means spreading your investments out across most if not all of the five main economic sectors.
If you want your growth investing strategy to be profitable for decades, then stick with our Successful Investor philosophy. As part of that, familiarize yourself with the characteristics of those growth stocks worth investing in.
Above average for years or decades
“By definition, growth stocks are companies that have above-average growth prospects. They are firms whose earnings have increased at a faster rate than the market average. Their growth is likely to remain above average for years or decades”….this free report shows how to identify the stocks that turn hidden value into accelerating gains.
The tips below for lowering your growth investing risk have long been part of the advice we give you in our investment services and newsletters, including our flagship publication, The Successful Investor.
Don’t overindulge in aggressive investments.
Be skeptical of companies that mainly grow through acquisitions.
Keep stock market trends in perspective, and realize that while the market often anticipates trends, no trend lasts forever.
Balance your cyclical risk by investing in growth stocks that have freedom from business cycles.
Keep an eye on a growth stock’s debt.
Look for growth stocks that have ownership of strong brand names and an impeccable reputation.
Industry prominence, if not dominance, should be a factor in choosing growth stocks to invest in.
Dependable investments have the ability to serve all shareholders.
The best growth stocks should have the ability to profit from secular trends.
Characteristics of growth stocks and secular trends
The best investments in this category are companies that can take advantage of trends that go far beyond mere business cycles and reflect ongoing changes in society. Examples include economic liberalization, the retirement of baby boomers, and the productivity gains available from continually evolving computer and communications technology.
Momentum stocks can mimic the characteristics of growth stocks; don’t get fooled
Momentum investing strategies focus on growth stocks—but with more of a short-term focus. Momentum investors like to trade actively and always hold fast-rising stocks that are reporting higher profits. These momentum investors don’t mind paying a high price, because they plan to sell quickly if the rise begins to falter.
In keeping with the Successful Investor approach, we think investors should avoid momentum investing strategies.
It’s very easy to confuse growth stocks with momentum stocks. Like growth stocks, momentum stocks often move up faster than the market average. But momentum stocks attract a different kind of investor. Growth-stock investors are in for the long haul, while momentum investors aim to profit from short-term trades. Momentum investors are particularly keen to jump in on a so-called “positive earnings surprise.” That’s when a company outdoes brokers’ earnings estimates.
Avoid companies with a corporate strategy of growth-by-acquisition when you search for growth stocks
Investors often underestimate the hidden risk of a corporate strategy of growth-by-acquisition. This strategy is inherently risky. It’s a little like buying new stock issues.
Acquisitions generally come on the market when it’s a good time to sell. That may not be, and often isn’t, a good time to buy. Insiders and managers at the selling company know a lot more than the buyers about the company itself, and its business strengths and weaknesses.
Some takeovers work out well for the buyers, of course. This doesn’t diminish the inherent risk. More important, the risk increases as takeovers become a habit.
Takeovers are more likely to succeed when the buyer is already a successful company and is under no pressure to buy anything. That way, the buyer can take its time and wait for a truly attractive, low-risk opportunity to come along.
Successful, well-managed companies do make acquisitions, but they use them as a tool for pursuing a core business rather than making acquisitions to form the core of their business.
Even at the best-managed companies, not all acquisitions work out well. Some stumble, and others fail miserably. The best companies cut the risk by only making takeovers that complement their strengths. They are willing to get out, even at a loss, when they see an exit as the smart thing to do.
That’s one more reason why we focus on high-quality, well-established companies. They make fewer takeover blunders. When they do make mistakes, they tend to recognize them earlier and cut their losses before they reach catastrophic levels.
How have you analyzed “hot growth stocks” in the past? Has that approach worked for you?
When you look for growth stocks, how have you stayed away from momentum stocks that lack long-term potential?
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