Is there a good time to buy a growth stock? Can you really time things perfectly to buy cheap and watch your purchase grow? Are there certain principles we should be following when looking for growth? Are there indicators that might help? How long do we need to hold a stock to really see the gains? These are some of the questions we would be asking ourselves when looking to buy growth stocks.
As it turns out, there are answers to most of these questions.
Growth stocks are usually younger companies. They have some innovative idea, product or specialty that helps them generate strong revenue growth that they mostly pump back into the business. As the company matures, the base sales and earnings grow and therefore, the rate of growth comes down. At that point, even a lower growth rate generates sufficient cash to build the business and also distribute to shareholders. So growth stocks have the potential for future dividends. But while they’re young and generating high growth rates, capital gains are the real goal of the investment.
And while nobody can really say for sure what’s going to happen to the market tomorrow, here are some solid pointers that should reduce the risk of picking duds.
Think about it this way. If you were going to start a business today, where would you rather be? Would you choose a segment with many buyers? Or would you pick a small niche where your success depended on people liking what you like? Obviously, if you choose the former, you’d have a greater chance of success. So that’s the first thing to consider. If you’re looking to invest in a growth stock for the long term, choose an industry with solid growth prospects.
Second, look at the recent sales history. Sales should be trending up evenly (allowing for seasonal variations). If the sales growth isn’t steady or accelerating, there may be low differentiation in the business or high competition. Or it could be that the market simply isn’t big enough to generate multiple years of strong growth.
Third, look at the long-term (3-5 year) earnings growth estimates from analysts. This gives you an idea about the consensus growth projections, so you have a better idea about market perceptions.
Fourth, consider the valuation. While you’re expecting capital gains from sustained growth rates, it doesn’t make sense to hugely overpay for something and then get priced down when the market goes into correction. So make judicial use of resources.
With these goals in mind, I’ve selected a few stocks that are looking good right now.
First up is Etsy, Inc. ETSY, which as we all know, provides online and offline marketplaces to buy and sell things like art, home and living, mobile accessories, jewelry and wedding items, among other things.
You can see its 3-year revenue growth trend below-
The company’s long-term growth rate is 26.50%
On a price to forward sales basis, ETSY trades at a multiple of 8.91X, which is relatively closer to its median value of 8.75X than its annual high of 13.09X. The S&P 500 meanwhile is trading at its annual high of 4.53X.
Second in line is JD.com, Inc. JD. Second only to Alibaba in China, which is the world’s biggest ecommerce market, its online platform and mobile applications offer computers, mobile handsets and other digital products; home appliances; automobile accessories; clothing and shoes; luxury goods including handbags, watches and jewelry, furniture and household products; cosmetics and other personal care items; food and nutritional supplements; books, e-books, music, movies and other media products; mother and childcare products; toys, sports and fitness equipment; and virtual goods.
Its recent revenue growth trajectory is impressive-
The company’s long-term growth rate is 46.79%.
On a price to forward sales basis, JD trades at a multiple of 1.09X, which is between its median value of 0.86X and its annual high of 1.17X.
Shopify Inc. SHOP offers its small and medium business (SMB) owners a multichannel commerce platform. The software can set up and integrate operations on the web, mobile and social media store fronts and marketplaces and also in physical retail locations. The company also offers transactional data for analytics and insight.
Shopify’s 3-year revenue growth looks good-
The company’s long-term growth rate is 32.50%.
On a price to forward sales basis, SHOP trades at a multiple of 44.64X, which is relatively closer to its median value of 43.28X than its annual high of 58.21X.
Through Wayfair.com and branded websites Joss & Main, AllModern, Birch Lane and Perigold, Wayfair Inc. W sells more than 18 million products from more than 12,000 suppliers in the home décor and home furnishings category.
Wayfair’s three-year revenue growth has been steady-
The company’s long-term growth rate is 23.04%.
On a price to forward sales basis, W trades at a multiple of 1.76X, which is between its median value of 1.45X and its annual high of 2.34X.
If you’re really looking for growth, you have to be able to stomach some of the gyrations in the market. Other than the regular seasonality which is evident in the above charts, there will be unforeseen uncertainties. The important thing is to try to see how any event could impact the long-term performance of your holdings. And it could pay to also keep an eye on the long-term growth estimate.
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