Looking to find the best growth companies to invest in? Here’s what to watch for, including hidden assets
Top growth stocks 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.
Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor. Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.
For a rising portfolio
Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor.
Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.
Learn to spot the characteristics of the best growth companies to invest in
Many investors overlook a number of important factors that can considerably lower their risk and help them more successfully invest in growth stocks.
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 more 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 some 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.
- Hidden value in undetected assets can lead to greater long-term returns.
- Top growth stocks have brand loyalty behind them.
- The best growth stocks should have the ability to profit from secular trends.
Hidden assets give you an advantage when looking for the best growth companies to invest in
If you buy a stock for its hidden assets, but those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it won’t hurt you much. By definition, a stock’s hidden assets have not had much impact on its price. If you paid little if anything for the assets, you have little to lose. But the best hidden assets will eventually expand a company’s profits, grab investor attention, and push up its stock price.
The best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets while you’re evaluating a stock can add enormously to your returns in the course of an investing career. But you need patience to profit from them, because they can stay hidden for some time after you buy.
Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot, since they are the last stocks that experienced, successful investors sell. When times are good, on the other hand, stocks with hidden assets tend to do better than average. Good times give them opportunities to put their hidden assets to work.
Look at various types of stocks to find the best growth companies to invest in
A few categories of stocks have historically shown strong growth potential—as well as typically coming with a higher level of risk. Types of growth investments include the following:
Small-cap Stocks: The size of a company is based on its market capitalization, or net worth. Market capitalization is the total value of all the company’s outstanding shares. It is calculated by multiplying the number of shares outstanding by the market price of a single share. There is no universal definition for a “small cap” company compared to a micro-, mid- or large-cap company. Many analysts, however, consider any company with a market capitalization of between $250 million and $1.2 billion to be a small-cap firm.
Companies in this category are often still in their initial phase of growth. Their stocks have the potential to increase significantly. Some studies show that small-cap stocks have historically posted higher returns than blue-chip stocks, but they are generally more volatile. They also carry a higher degree of risk. But some small-cap stocks can outperform large-cap stocks during periods of recovery from a recession.
Technology and Healthcare Stocks: Investors looking for a growth stock with strong potential often look for companies that develop new technologies or offer innovations in healthcare. The stocks of companies that develop popular or revolutionary products can rise exponentially in price over a relatively short period of time.
Speculative Investments: Aggressive investors sometimes look to boost their gains with high-risk growth investments such as penny stocks, futures and options contracts, foreign currency and real estate deals that involve undeveloped land. Those who pick winners here can earn a return that is many times their initial investment. But they also often lose all of their investment.
Use our three-part Successful Investor approach to find the best growth companies to invest in
- Hold mostly high-quality, dividend-paying stocks.
- Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
- Downplay or stay out of stocks in the broker/media limelight.
What’s been your commitment to holding growth stocks? Do you hold them long term or do you sell them as soon as you can make a profit?