Topic: Growth Stocks

Here’s how to find the best stocks with long-term growth potential

growth vs value investing

Investing in the best stocks for long-term growth will likely see you focusing on companies that don’t pay dividends but instead reinvest for future growth

Growth stocks are companies that are likely to have sales and earnings growth well above the market average. Frequently they pay few, if any, dividends. Instead they typically reinvest any extra cash flow to promote further growth. All in all, the best growth stocks will have a good long-term history and favourable prospects.

Chosen wisely, according to Pat McKeough’s advice, the best stocks for long-term growth can be worthwhile additions to most well-diversified portfolios.

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Follow these tips for successfully investing in the best stocks for long-term growth

Although growth stock picks can be volatile, they can make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they are growing at a higher-than-average rate within their industry, or within the market as a whole, and could keep growing for years or decades.

For most investors in growth stocks, you should limit your most aggressive growth investment holdings to a smaller part of your overall portfolio. But growth stocks overall typically have the potential for higher returns, especially if you always focus on investment quality first.

Here are some tips for selecting the best growth stocks as long-term investments:

  • While you are looking at balance sheets, look for hidden assets like real estate. At times, the hidden value in a company’s real estate can even come to exceed the market value of its stock.
  • When investing in the most speculative 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. If you are too slow to sell speculative stocks in your growth portfolio, your profits, and even your principal, can evaporate all too quickly.
  • Try to find 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. 

Remember that the best stocks for long-term growth will likely benefit from compounding if they also pay dividends

Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long-term. This is especially important for young investors to learn.

Note, though, that the benefits of compounding apply to dividend-paying stocks as well as fixed-return, interest-paying investments such as bonds. When you earn a return on past returns, including dividends, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

Recognize that a strong balance sheet, industry prominence, and a record of earnings and cash flow are good indicators of safety when you look for the best stocks for long-term growth

The successful investor approach also looks for a strong balance sheet with a manageable level of debt. How a company spends its money is important, too. Acquisitions can be good, for instance, but too many of them can take a bite out of a company’s cash and push the debt load (and goodwill) to uncomfortable levels.

Companies with a major presence in their industry, and those that also anticipate advances in their industry, adjust to changing conditions and technology. They also withstand strong competition and have the confidence to pay dividends year after year.

Note that a consistently strong balance sheet can only be maintained with a regular stream of revenue and earnings to generate steady cash flow.

Avoid selling your best stocks for long-term growth too early and keep gains in your portfolio

It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.

You can always find a reason to sell. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless. This is a good thing. After all, you can only buy a stock if somebody who owns it wants to sell.

Before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

Use our three-part Successful Investor approach for finding and investing in the best stocks for long-term growth

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight. 

Do you believe investing in a company for its growth potential is a controversial strategy?

How much do you consider long-term growth potential when you analyze a stock?

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