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Collin Harness


How To Choose Growth Stocks

Growth stocks are a great way to grow your portfolio value over time. You buy in when the company is smaller and as the business grows so does your investment.

But growth stocks are volatile. It is not a smooth ride going from $1Billion in revenue to $10-20Billion in revenue. Some companies will not live up to the hype. Some companies will get bought out.

3 Businesses I have invested into have been bought out:

- Marvel = Disney

- Slack = Salesforce

- Zendesk = Private Equity

    1. Market Cap

    Big tech: Apple, Amazon, Google could be considered growth, because their revenue is still dramatically increasing. But for the purposes of your growth portfolio you want to invest in smaller market cap businesses. This will allow your portfolio to double or triple in value more easily.

    $1-15Billion is generally my target for growth businesses that I am not already invested into. If you are already invested into certain position I recommend continuing to add to your winners. That rocket ship will most likely continue to rise over time and you want to ride it.

    2. Product/service expansion

    Before you make an investment make sure you have a basic understanding of what the business actually does.

    You don't need to know everything. Just because you do hours and hours of research does not mean the stock will perform any better.

    Performance of a stock comes down to management execution of their business plan.

    Understand what the business is doing and then understand where they are going. How many products/services do they currently offer and how many do they want to offer in the future. The more products generally means more sales. There many business that offer hundreds of product lines.

    Are they expanding their products? Are they expanding their footprint?

    Right now I like Dutch Bros coffee, because they are expanding their store count across the country. Over the next 10 years they will open hundreds of new stores and bring in a lot more revenue.

    3. Growing sector

    Invest in the future. This means find sectors of the economy that are growing overall.

    Physical retail is dying. Utilities grow slow. Office buildings are empty.

    Look for those sectors that are continuing to grow: clean energy, eCommerce, technology, healthcare. The demographics of the sector will hopefully lift all boats including your investment. Also look for the leader in a growing sector. Amazon in eCommerce. Google with online search.

    4. Revenue growth

    Right after market cap you should be looking at revenue. Revenue growth is the most important metric of a business. Are they selling more and more products over time?

    Growth stocks have revenue that grows year over year, even in a bad economy.

    You want to see that line trendy upward quarter after quarter.

    Don't worry about profits when looking at growth businesses. They should not be going into debt, but they should also be spending money to expand their business. Once they reach a certain level of revenue they will have the profits to buyback stock.

    5. Monopoly or market dominant

    Google owns search. Microsoft owns the desktop and business software. Palantir owns government data. Amazon own eCommerce. Netflix owns streaming, for now. Apple owns all the apps on their iPhones.

    You want to find a company that is a monopoly. A business creating their own universe that they own. Because those will be the big winners. One entity that controls a popular platform that has a network effect.

    6. Only select a few and invest for the long term

    Day trading is a whole different animal. There is money to be made trading in and out stocks, but investing in growth is a long term game.

    Invest in a handful of stocks that you think will work the future. No more than 15. Really less than 10 is ideal. And if you are really confident in something than maybe just 1 or 2.

    You want to concentrate your resource into those growth stories that are going to really make your money grow large and you will earn lower returns investing into the overall market. That is more ETF investing.

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