Stock Picking for Growth investors
November 30, 2009
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RELATED TICKERS: APWR
, CNIT
, HOGS
From my perspective, there are two types of investors.....growth investors and dividend investors. For those of you who are dividend investors, you can probably stop reading. This blog does not cover how to find and choose stocks who are going to pay consistent and increasing dividends to provide consistent slow DRIP profitable growth.
Instead, I want to share a few obvious things to look for when picking a growth stock that will provide the stock increases that growth investors are looking for.
First, I want to emphasize that you are picking a business, not a stock.
1) Find a company that is filling a need that is not completely satisfied. This means that the sector that the company operates in has higher demand than supply. This means that there is room to grow without having to steal market share from competitors. This could be an emerging market, or just unfilled demand. It could be an area where there are few standards or consolidation.
2) Understand and assess the growth model that this company needs to undertake, and find out if they are pursuing this method of growth. Without a vision, a company is not going to grow. Is the plan for growth reasonable, practical and achievable?
3) Find a company that has a best-in-class business and operating model. The products or services that are provided by the company should be a premium to its competition, or it should have a better method of producing or providing that product that allows it to produce it cheaper or more quickly.
4) Choose a stock with no dividend payment. For growth companies, dividends are a scourge. They extract capital that otherwise could be used to grow the business more quickly. If used effectively, the dividend money should return many times it's value in earnings over time if invested back into the business. This is how businesses grow. They invest their earnings back into the company to fuel its growth.
4) Ideally, choose a business that is able to grow positive revenue and earnings with little or no debt. While leverege can increase the speed at which a company grows in the short term, and it can sometimes fuel explosive growth, it can also hinder the company. Profits end up being used to pay down debt liabilities rather than being used to fuel further growth. There can be quality exceptions to this rule, but it won't hurt you to follow this guideline.
5) Choose smaller, but established companies. It can take years for a new business to stabilize before it is situated in a way that it can grow successfully. Businesses are most likely to fail in the first couple of years in business. There is a great deal of risk in investing in very small companies. However, it is much easier for a small company to grow by large percentages than a large company. Ideally, you are trying to find small, established companies that are on their way to becoming large companies.
6) Buy companies that are under-valued. There are many very good small companies in the world that are growing quickly. However, some of these companies have prices that more than account for their growth. Understand current and revenue and earnings, but more importantly understand future revenue and earnings projections. Understand what is good and what is bad for your company.
7) If a company's price increases to the point where it no longer provides a discount to your perceived value for the company, move on to another company that provides better growth value potential. If the company continues to grow and expand in such a way that you never reach this point, congratulations, you've latched onto a long-term winner.
Most of my favorite growth stocks right now are in China, but there are quality companies that fit these characteristics everywhere. If you find them and invest in them at good prices, you will be a very successful growth investor.
I am currently invested in APWR, CCGY, YUII, CPBY, LLFH
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