The most essential factor to make a successful investment in the financial markets is to find assets that show the highest pace of performance. Fastest growing stocks can produce double-digit growth, they are always ahead of the rest of the market, acting as investment magnets. Traders and investors around the globe spend a lot of time to find the most profitable companies to invest in, buying their shares with a growth perspective.
However, this is not an easy task as the wide variety of global corporations, different market conditions and a large number of factors driving the overall success in the tight competitive environment make the process of selecting most profitable shares complicated.
This article is aimed to provide an in-depth guide of how to choose the fastest-growing stocks for investment, step-by-step explanation of factors impacting shares prices to grow faster than others and show several examples of the most attractive companies to invest in 2020
What are growth stocks?
Growth stocks are shares of companies with the largest potential to get more expensive than the rest of the market within the same period. In most cases, Growth stocks’ performance can be described as an explosive rise in price due to several factors. First of all, such companies have unique sales points or product lines, which helps them to stay ahead of their competitors. Although this type of enterprises does not promise large dividend payouts to its investors, the gain is in capital growth when investors benefit on shares’ growth in price and resell them after some time.
Growth companies reinvest profits to be ahead of the competitive environment, develop technological advantages and patents and use innovative projects. The innovation forces those companies to be investor-friendly as they have to attract comparatively large amounts to invest in future advantages, while the main benefit for a potential investor would be the growth of the company’s shares value. Unique service or product the company provides allows it to gain the market share faster compared to a high-competitive environment, which leads to a sharp rise in the revenue. Growth stocks can be chosen in the small-cap sector as many startups have a large potential for growth. However, big companies can also be considered as growth stocks.
Growth stocks versus Value stocks
Value stocks often pay dividends but are undervalued. Growth stocks are traditionally supported by media attention and are overvalued amid a huge flow of investors rushing to purchase those companies’ shares. The main difference is in the speed of market expansion as Value stocks keep holding a certain market share with the comparatively slow growth of such metrics as sales and revenue volume, the level of production and output, as well as quarterly and yearly profits. This stable performance helps such companies to stay above the surface and even develop to some extent. However, they are not interested in attracting a huge number of investors to fund some project or a particular technology. Value stocks are attractive for investors amid the high level of dividend payouts they provide every quarter.
Best growth stocks
The explosive-kind of growth in financial reports of highest growth stocks makes them the most attractive field of investment and trading in the financial markets. Best growth stocks rise in value by a double- or even triple-digit growth on a yearly basis. On top of that, the most lucrative investment is made when investors acquire the best growth stocks at an early stage of companies’ development because the initial stage of startups’ development is the fastest and one.
Large corporations could appear from nothing, creating an entirely new type of product or service, which attracts buyers around the globe. For example, people never heard about smartphones at some point before, but now the industry is huge in terms of yearly turnover. The same story is about tech companies including Google, Amazon, Facebook and Tesla. Those companies create a new market, holding the leadership in it for some time. However, every new market is supposed to get into a saturation level at some point, which slows the shares’ growth pace down.
Best growing stocks always overperform the rest of the market. This is why it is important to monitor the pace of growth for a stock index the company is listed in and compare it with the performance for a particular company share. Once an investor finds a company, the shares of which overperform the appropriate index, then this company could be attractive in terms of growth stock investment. Below is an example of several companies that overperformed the market in 2019. The list includes only shares performance compared to the overall market, while other fundamental metrics will be disclosed later.
Microsoft (NAS:MSFT) +58.41% versus NASDAQ +38.26%.
Disney (NYSE:DIS) +33.79% versus S&P 500 +28.97%
Visa (NYSE:V) +44.54% versus S&P 500 +28.97%.
The charts above show a comparison of shares performance versus the stock index they are listed in.
How to find the fastest-growing stocks?
Before making the final decision of purchasing a certain stock in their portfolio, investors should compose a buy-list of potentially attractive stocks to invest in 2020. Besides the technical analysis and the comparison of companies’ performance versus the overall market gain, investors should pay attention to fundamental factors. Here is a shortlist of key metrics to watch when choosing the fastest-growing stocks today:
Analyse three key metrics:
Revenue growth in recent 5 years;
Earnings per share (EPS) growth in 5 years;
Dividend growth (5-year trend).
The key metrics show the overall picture within a long-term perspective. However, investors should keep in mind that one of the most important factors for a company to grow constantly is stability. This is why additional metrics and short-term analysis also matters.
Additional fundamental metrics to watch when choosing the fastest-growing stocks:
Price-earnings ratio (PE);
Long-term debt and debt-to-equity ratio;
Operational cash flows;
Payout and cash payout ratios.
An in-depth analysis of recent trends for all of the metrics described above would give an investor a wide view of a company’s business processes happening within a certain period. Any sudden jump or drop in quarterly figures should be watched closely in terms of understanding the reasons caused an abnormal metric to appear. Knowing all of the details related to any particular company is the most essential factor in the decision-making process of choosing the best stocks to invest in 2020.
Although the current year started with a bearish retracement for most of the major stock indices amid taking-profit flows and geopolitical and macroeconomic events, the equity market is still full of investment opportunities with explosive growth in the upcoming year. Here are several fastest-growing stocks that have a great chance to keep surprising investors in terms of earnings per share (EPS), revenue and market cap growth, as well as the potential long-term performance of the cost of their shares.
Palomar Corporation (NAS: PLMR). Estimated EPS growth in 2020: 123%
Inmode ltd (NAS: INMD). Estimated EPS growth in 2020: 106%
Fastest growing stocks represent the most lucrative type of investment in the financial market. Thanks to the explosive pace of growth, technological innovative solutions and creation of new services or products, companies develop new market segments, expand their footprint, market cap and revenue. This process requires a large volume of investment to launch a startup, thus, companies are more investor-friendly, offering a revenue share of the business. All that makes new companies attractive for equity investors and traders in the financial markets as potential profit performance might be far above the market average. Although such companies cannot compete with value stocks in terms of dividend payouts, the double-digit performance of their shares cost makes them lucrative compared to the common growth of an industry, sector or the whole stock index in general. Finding best growth stocks for investment is not an easy process due to many factors influencing the overall success. However, the potential gain could overcome all of the efforts, especially from a long-term perspective.