Growth companies are companies that are expected to grow substantially faster than others. Often growth companies are young companies in strong growth mode or established companies in expanding industries or those involved in new technologies. Most growth companies do not pay a dividend so investors, instead, focus on earning profits through capital gains. Growth investors are concerned with a company’s future growth potential, and there are many formulas and methods to find such companies. Let’s look at five of the things I look at when searching for growth opportunities.
1. Strong historical earnings growth I start by looking at a company’s past. Though past results are no guarantee of future results, it is still a great place to start. As a growth investor I start by looking to see if the company’s annual revenues have been growing in the past. I specifically look for companies with strong Earnings Per Share (EPS) growth over the last five years. Ideally, I like to see strong 10-year EPS growth as well. If a company has displayed good growth over the last five- or 10-year period, there is a strong possibility that this trend is likely to continue.
2. Strong forward earnings growth My minimum projected five-year growth rate is at least 10-12%, but I prefer companies that show a growth rate in excess of 15%. Though forward estimates are only expectations, it still helps to see how analysts view the company’s future prospects.
3. Strong management team that is controlling costs and growing revenues. I tend to look very closely at profit margins. This is an assessment of a firm’s income as a percentage of its revenue. If a company has margins at 25% that means it is earning 25 cents for every dollar’s worth of products or services it sells. Margins will vary by industry with retailers often having thin margins due to tight competition. Technology and health related companies tend to have wider margins with more price flexibility. I look for firms with the best profit-to-sales ratios in its industry with expanding margins quarter-by-quarter and year-by-year.
I find that those with the highest margins tend to have stronger pricing power for their products or better control inputs to produce their products at a lower cost than the competition. By comparing a company’s present profit margins to its past margins and its competition’s profit margins, it helps gauge whether or not management is controlling costs and revenues and improving or lowering margins. To make things easier I look to pretax margins (simply divide the firm’s income from operations before taxes by its net sales). If a company exceeds its previous five-year average of pre-tax profit margins and also is above the industry average, it certainly makes a good growth stock candidate.
4. Strong, efficient business operations Here I look at return on equity (ROE). If a company is efficiently using its assets you will see stable or rising ROE. To get a good pulse on a company, I compare a company’s present ROE with its five-year average ROE and with that of the industry. If it beats both criteria, again it’s a good growth stock candidate.
5. Stocks with a strong chance of doubling in price over the next five years If a stock cannot realistically double within the next five years, it’s not really a growth stock. So that is why I focus so heavily on a 15% annual growth rate, which would enable the stock to double within the next five years.
At Wall St Renegade, we have three portfolio strategies that focus on growth investing. Our Dueling Duo Portfolio (DDP) invests in large cap momentum stocks. Our Contrarian Strategies Portfolio (CSP) buys mid cap innovative growth companies, and our Tomorrow’s Treasures Portfolio (TTP) focuses on up and coming small companies.
There are three growth stocks worth a closer look for investors seeking to maximize returns: From our Dueling Duo Portfolio (DDP), Biogen (BIIB) is a stand out growth stock. It is a global biotechnology company that discovers, develops, manufactures and markets therapies for the treatment of multiple sclerosis (MS) and other autoimmune disorders, neurodegenerative diseases and hemophilia. The stock has been growing at a 20% annual clip for more than a decade.
From our Contrarian Strategies Portfolio (CSP), Green Mountain Coffee (GMCR) is a favorite of mine! It boasts a nearly 50% annual growth rate over the past 15 years. Green Mountain Coffee Roasters, Inc., is engaged in the specialty coffee and coffee maker businesses. It has three business segments, the Specialty Coffee business unit (SCBU), the Keurig business unit (KBU) and the Canadian business unit (CBU).
From our Tomorrow’s Treasures Portfolio (TTP), Neogen Corporation (NEOG) is a stand out growth stock. It develops, manufactures, and markets a diverse line of products dedicated to food and animal safety. It has been growing by nearly 25% a year for the past decade.
If you are looking for more aggressive, up and coming growth stocks that don’t quite have the track record yet, but have explosive growth potential, take a close look at Ubiquiti Networks Inc (UBNT), LinkedIn (LKND), and Tesla Motors (TSLA). All three of these have produced triple digit returns over the past 12 months!
Bottom Line: Growth stocks offer investors a great way to potentially double their portfolios in five years or less. Though it is not always a smooth ride with these stocks having a lot more volatility, for those who are disciplined and patient, growth stocks can help you turn small investments over time into a large nest egg in retirement.
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