How to choose growth stocks
Investing in growth is only for the patient. It can decades for a good growth stock to mature and deliver high returns for the investor.
1. Revenue is increase for the last 3-5 years
I want to see revenue increase year over year for several years and preferably by a health amount like 10%+
2. They are probably not profitable year
They may be spending more than their revenue in order to grow. But if I am going to invest I want to see that they are shrinking their losses year over year and they are growing revenue.
3. Generally they do not pay dividends
There are a few exceptions. Instead they are investing in grow the core drivers of top line revenue.
4. I prefer the market leader
I want a stocks that are the leaders in their space. Or are carving out their own lane.
5. The sector is growing
A rising tide lifts all boats.
Either growing or a business is disrupting an old sector. Uber. Airbnb etc.
6. Look carefully at management
Are they visionary or just a plain crazy. It is a fine line. Study the differences between Zuckerberg and Neumann.
You want leaders that can execute.
7. No funny numbers
Stay away from businesses with financial statements that are too complex.
8. Cheap, but not too cheap
You don't want your growth stock cratering before it gets big.
9. Watch out for shareholder dilution
Growth businesses often use stock as a way to give large paydays to insiders which is bad for the existing shareholders.
10. Have an exit plan for every growth stock
Take this one with a grain of salt. I do it, but do not live by it.
Whenever I purchase a new stock I write down why I purchased it and then I write down a number that I would be happy selling it for. This practice helps me remember why I purchased it in the beginning.
But many times I just let my winners keep winning. Like Facebook, it surpassed my sell number, but I still think the stock has room to run so I am still invested in it.
11. Boring companies can also be growth stocks
One of the best investments I have ever made was in Dollar General. A rather simple low cost retail store, but a business that can grow rather quickly.