to achieve when you seek solid, value-oriented companies in growing industries. It’s also worth emphasizing that time, patience, and discipline are key factors in your success — especially in the tumultuous and uncertain stock investing environment of the current time (2020–2021).
Choosing Growth Stocks with a Few Handy Tips
Although the information in the previous section can help you shrink your stock choices from thousands of stocks to maybe a few dozen or a few hundred (depending on how well the general stock market is doing), the purpose of this section is to help you cull the so-so growth stocks to unearth the go-go ones. It’s time to dig deeper for the biggest potential winners. Keep in mind that you probably won’t find a stock to satisfy all the criteria presented here. Just make sure that your selection meets as many criteria as realistically possible. But hey, if you do find a stock that meets all the criteria cited, buy as much as you can!
To pick a winning stock, don’t just pick a stock and hope that it does well. In fact, your personal stock-picking research shouldn’t even begin with stocks; you should first look at the investing environment (politics, economics, demographics, and so on) and choose which industry will benefit. After you know which industry will prosper accordingly, then you can start to analyze and choose stock(s).
After you choose a stock, you should wait. Patience is more than just a virtue; patience is to investing what time is to a seed that’s planted in fertile soil. The legendary Jesse Livermore said that he didn’t make his stock market fortunes by trading stocks; his fortunes were made “in the waiting.” Why?
When you’re told to have patience and a long-term perspective, you’re waiting for a specific condition to occur: for the market to discover what you have! When you have a good stock in a good industry, it takes time for the market to discover it. When a stock has more buyers than sellers, it rises — it’s as simple as that. As time passes, more buyers find your stock. As the stock rises, it attracts more attention and, therefore, more buyers. The more time that passes, the better your stock looks to the investing public.
Looking for leaders in megatrends
A strong company in a growing industry is a common recipe for success. If you look at the history of stock investing, this point comes up constantly. Investors need to be on the alert for megatrends because they help ensure success.
A megatrend is a major development that has huge implications for much (if not all) of society for a long time to come. Good examples are the advent of the internet and the aging of America. Both of these trends offer significant challenges and opportunities for the economy. Take the internet, for example. Its potential for economic application is still being developed. Millions are flocking to it for many reasons. And census data tells us that senior citizens (over 65) will continue to be a fast-growing segment of the U.S. population during the next 20 years. (Millennials are another huge demographic that investors should be aware of.) Small companies can be the ones poised for the most potential growth.
Comparing a company’s growth to an industry’s growth
You have to measure the growth of a company against something to figure out whether its stock is a growth stock. Usually, you compare the growth of a company with growth from other companies in the same industry or with the stock market in general. In practical terms, when you measure the growth of a stock against the stock market, you’re actually comparing it against a generally accepted benchmark, such as the Dow Jones Industrial Average (DJIA) or the Standard & Poor’s 500 (S&P 500).
Considering a company with a strong niche
Companies that have established a strong niche are consistently profitable. Look for a company with one or more of the following characteristics:
A strong brand: Companies such as Coca-Cola and Microsoft come to mind. Yes, other companies out there can make soda or software, but a business needs a lot more than a similar product to topple companies that have established an almost irrevocable identity with the public.
High barriers to entry: United Parcel Service and Federal Express have set up tremendous distribution and delivery networks that competitors can’t easily duplicate. High barriers to entry offer an important edge to companies that are already established. Examples of high barriers include high capital requirements (needing lots of cash to start) or special technology that’s not easily produced or acquired.
Research and development (R&D): Companies such as Pfizer and Merck spend a lot of money researching and developing new pharmaceutical products. This investment becomes a new product with millions of consumers who become loyal purchasers, so the company’s going to grow. You can find out what companies spend on R&D by checking their financial statements and their annual reports (see Chapter 4 in Book 3).
Checking out a company’s fundamentals
When you hear the word fundamentals in the world of stock investing, it refers to the company’s financial condition, operating performance, and related data. When investors (especially value investors) do fundamental analysis, they look at the company’s fundamentals — its balance sheet, income statement, cash flow, and other operational data, along with external factors such as the company’s market position, industry, and economic prospects. Essentially, the fundamentals indicate the company’s financial condition. Chapter 4 in Book 3 goes into greater detail about analyzing a company’s financial condition. However, the main numbers you want to look at include the following:
Sales: Are the company’s sales this year surpassing last year’s? As a decent benchmark, you want to see sales at least 10 percent higher than last year. Although it may differ depending on the industry, 10 percent is a reasonable, general yardstick.
Earnings: Are earnings at least 10 percent higher than last year? Earnings should grow at the same rate as sales (or, hopefully, better).
Debt:
