Is it possible to spot the best growth stocks? You know, the ones that will grow the most in the future? Unless you have a crystal ball, it’s tricky, to say the least!
The good news is that there are some basic principles you can use to spot a great investment. Let’s take a look.
Growth stocks stand apart
Companies with growth stocks stand out from the crowd. Tesla stock has grown by 2,915.66% in the past five years. That means that if you’d invested £1,000 five years ago, it would now be worth £29,156 – not a bad return!
The reason Tesla stocks have grown so fast is because of the unique nature of the company. It’s not just any old car manufacturer; it stands apart by creating innovative green technology.
According to Business Insider, although “most people know Tesla for its sleek and luxury electric cars and its eccentric CEO Elon Musk, … some may not know the electric vehicles are equipped with a plethora of features that you wouldn’t find in any other vehicle.” In total, they found 22 features that make Tesla cars stand apart from the competition.
Tesla is also one of the best growth stocks because it’s in a sector that’s growing fast. Government initiatives and green policies mean that there’s a great potential for the company to grow in the future.
Look for good value
Professional investors often look at the financial accounts of companies to work out whether they’re good value investments. This can tell them whether they’re likely to be growth stocks in the future.
The most common way to spot good value stocks is to measure a company’s price-to-earnings ratio or P/E ratio. It’s calculated by dividing the price of the shares by the earnings per share (profit divided by the number of shares issued).
For example, imagine you buy shares in company A for £40 per share, there are 10 million shares in circulation and the company has a profit of £50 million. The earnings per share are £5 (£50m/10m) and the P/E ratio is 8 (£40/£5). That means you’d have to invest £8 to get £1 in profit.
Bear in mind that even if you find a company with a great P/E ratio, it doesn’t necessarily mean it will be one of the best growth stocks. There may be another reason the company has a low share price, such as a difficult market sector or bad news about the company.
Be sure to do your research and follow the famous investing saying: don’t invest money you can’t afford to lose!
Buy a value or growth fund
If you’re not sure how to pick the best growth stocks yourself, the good news is that there are ready-made funds you can invest in. Look for funds with ‘value’ or ‘growth’ in the title.
The benefit of investing in this type of fund is that your risk will be spread across many different companies, and you won’t have all your eggs in one basket.
Cast your net wide to buy growth stocks
Because it is so hard to spot growth stocks, some experts don’t even try. They work on the principle that if you cast your net wide enough, then you will automatically buy the stocks that will grow the most in the future.
The world’s most famous billionaire investor, Warren Buffet, recommends investing in a low-cost index fund. That way you’ll be invested in all the companies on the stock market. You’ll definitely have shares in the best growth stocks for the future.
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About the author
A Chartered Accountant, Mum and personal finance geek, Alice writes on topics including budgeting, saving and investing.
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