“You should be looking for the next great growth stock.” Olivier Garret, founding Partner and CEO of RiskHedge
Cheap” Stocks Are Often The Worst Stocks You Can Own
By “cheap,” we mean stocks that have a low stock price in relation to their sales or earnings. If a stock trades for $20/share and earns $4/share, it’s cheap. If it trades for $200/share and earns $4/share, it’s not cheap.
People are drawn to “cheap” stocks for the same reason they flock to the Macy’s Department store clearance rack. It feels good to get a deal. Americans love nothing more than getting lots of “bang for their buck.”
But in investing, this can be a dangerous mistake. These stocks are cheap for a reason! They’re usually in dying industries or are a declining business. So they’re either barely growing, or shrinking.
“Cheap” does NOT equal “safe” in the stock market. Focusing on “cheap” stocks is not a wise investment strategy. Instead, you should be looking for the next great growth stock at a reasonable price.
Growth Stocks
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett
Growth stocks are companies that increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole. Growth stocks are great buys, especially if you can identify those with fair valuations, excellent fundamentals and capitalize on their momentum. Focus on one of the fastest-growing companies on the planet.
In the current environment where each of these stock picks offers a good balance of growth and value, it’s a great play to diversify your portfolio.
Unlike the cheap stocks some growth stocks are growing like crazy.
High-growth stocks tend to be more expensive than the average stock in terms of valuation metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios. Yet, despite their premium price tags, the best growth stocks can still deliver fortune-creating returns to investors as they fulfill their awesome growth potential, according to Motley Fool.
Earnings Growth
Earnings and cash flow growth are arguably the two most important factor, as stocks exhibiting exceptionally surging profit levels and cash flow tend to attract the attention of most investors. And for growth investors, double-digit earnings and cash flow growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.
Impressive Asset Utilization Ratio
Asset utilization ratio — also known as sales-to-total-assets (S/TA) ratio — is often overlooked by investors, but it is an important indicator in growth investing. This metric shows how efficiently a firm is utilizing its assets to generate sales.
Investing in growth stocks can be a great way to realize life-changing wealth in the stock market. The key, of course, is to know which growth stocks to buy — and when, and to be patient.
Even renown value investor, Warren Buffett, uses an approach that swings towards growth. This quote from Buffett is a classic articulation of the strategy: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In other words, price is an important part of any investment, but the strength of the business arguably matters just as much, if not more.
References:
- https://www.forbes.com/sites/oliviergarret/2020/10/08/why-you-should-focus-on-growth-stocks-today/#72d1ee102b81
- https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/
- https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/how-to-invest/