We can classify stocks into three main types.
- Standard stocks: these are stocks in companies that are operating normally in the market. The market prices the shares according to the company’s performance.
- Value stocks: these stocks are underpriced and offer significant returns if future events move in their favour.
- Growth stocks: stocks in companies that we expect to perform better than the market average.
We are most concerned with growth stocks. A growth stock shows that analysts expect that a company’s revenues and earnings will increase faster than other companies in the same field.
Usually, a company with growth stocks has a competitive advantage. You should be aware that growth stocks often do not pay dividends. This is because the company diverts any profits back into itself.
Hypothetical Example of a Growth Stock
FlabGone Limited claims that it has discovered a treatment that safely and quickly helps people lose weight and that they are running final tests on the product. If all goes well, they will launch the product next year.
This announcement causes a spike in share value. If, when the tests are complete, they prove that the product is effective and safe, shares will continue to rise in value.
Of course, few companies make such a dramatic breakthrough in the real world, but some consistently perform better than their rivals.
The Current Situation With Growth Stocks
So what are the current growth stocks out there, seeing that FlabGone is merely a hypothetical situation?
Netflix continues to be a strong performer in an increasingly competitive market. It invests heavily in its business and should continue to offer solid returns.
Analysts expect that Shopify will continue to outpace its rivals and that revenue will continue to grow.
Alphabet’s earnings per share rate show a historical growth rate of 21.7%. Experts forecast that it will grow by 50% in 2021.
Amazon’s business model consistently outperforms its rivals and keeps it one step ahead. There is no reason for us to believe that Amazon will not continue to innovate. It is an empire of sorts.
Fiverr holds a leading position as a gig-economy platform. Gig workers are independent contractors. This type of work is increasingly popular among both employers and employees. A platform such as Fiverr could take advantage of this trend and should show sustained growth as it consolidates its position.
Although less popular than other platforms with younger social-media users, Facebook buys rivals and continues to hold a dominant position. It should continue to show growth.
An Unexpected Growth Stock: Construction
An investor might typically find future growth stocks in high-tech and e-commerce fields. This is what you would expect. However, in my opinion, there is another area worth looking at, construction.
Natural disasters and ageing housing and industrial units mean that demand for construction services and materials will increase. Companies that build, manufacture materials, or hire out machinery will show strong growth. The United States government demonstrates what I mean.
“The United States is the wealthiest country in the world, yet we rank thirteenth when it comes to the overall quality of our infrastructure. After decades of disinvestment, our roads, bridges, and water systems are crumbling. Our electric grid is vulnerable to catastrophic outages. Too many lack access to affordable, high-speed Internet and quality housing.”
If only a part of Biden’s infrastructure plan sees the light of day, demand will soar in all construction sectors.
Investing In Construction
One stock that investors might like to keep an eye on is Cemex. At the moment, we can classify its stock as a value stock. It is trading at a low price.
With operations from Peru to Poland, the Mexican multinational Cemex is a building materials company that is well-positioned to take advantage of a construction boom. Analysts are forecasting that its earnings will improve, but I believe that they are underestimating future demand.
If Cemex doesn’t interest you, other construction companies have the potential for strong growth. It is an area well worth investigating.
Another Smart Choice: Online Education
The examples listed above show that you can easily find growth stocks in e-commerce and technology. But one other sector that will continue to grow is online education. Over the last few years, online learning has become more popular and more sophisticated. The cost of going to a traditional university is prohibitive for many people. Online education is fast becoming a viable alternative.
One company we should look at, in particular, is 2U. 2U is a company that combines “technology, people, and data to help top universities transform in the digital era…” A company such as 2U will see strong and consistent growth for the foreseeable future.
Value or Growth Stocks?
A rule of thumb is that growth stocks perform better than value stocks when the general economy is doing well. However, in uncertain times, the opposite is true and value stocks outperform growth stocks.
In general, value stocks are riskier than growth stocks. Companies do not necessarily undervalue value stocks. But their low price might reflect a good reason for market scepticism.
Since 1926, according to Bank of America (via Forbes), value stock investing has returned 1,344,600%, whilst growth stock investing has returned 626,600%. This suggests that value stocks are the better bet. However, it depends on the economic situation. Value stocks have performed better since 2010 but, before that, growth stocks were performing better.
Finding a growth stock is not difficult, and some companies seem certain to hold onto a dominant market position. Amazon is an example of this.
You could play it (reasonably) safe and simply invest in one of the stocks listed above. But if you want a diverse portfolio and more fun, I suggest that you look around and try to identify stocks with growth potential. Definitely do some research and read analysts’ reports.
Finally, I would suggest that you don’t invest only in growth stocks. Your portfolio should include some growth and some value stocks, thus spreading the risk.