What to look for in a potential growth stock
The majority of our penny stock recommendations are growth stocks, as value stocks are hard to find nowadays. We use the three following attributes spot growth stocks. Below, we break them down to help you find similar securities and understand what makes these investments so great.
A competitive advantage is necessary when investing in a growth stock. A lot of investors think a competitive advantage is just a good product line, but it could be anything. This includes location, improving demand, strong customer relationships or even the business model.
For example, our past stock recommendation LRAD Corp. (LRAD), has an outstanding product line and product quality in comparison to its competitors in the mass notification system industry. This is seen is a competitive advantage that could improve demand later on.
MARKET SHARE OR NEW MARKET POTENTIAL
In order for a company to grow, it needs space. Whether it’s a new market that it could penetrate or more market share for the taking, this is an important factor. The easiest way to think about this is just in terms of a pie chart. Let’s say in scenario A, the company has 50% of the market share. So moving forward, it has a huge amount (50%) for the taking.
In scenario B, the company has almost all of the market share. That is considered a big benefit for most companies, but leaves little room for growth. However, if it has a whole other market that it could penetrate, then there is room for growth.
Either the potential market share in scenario A or the entirely different market with plenty of opportunity (scenario B) are necessary for a growth stock.
TOP LINE GROWTH
Revenue growth is vital for growth stocks as the bottom line can be misleading. Most growth companies will ignore lacking net income and overwhelming debt as these are not a priority. Although these two things worry fundamental investors, they are not a problem if the top line is growing. Combine this top line growth with the two aforementioned attributes and you have yourself a great growth stock.
Growth stocks are exciting to invest in, as often times they tell a great story. Beyond a company's story, make sure to look for the three attributes above in addition to the Bowser Rating System factors. The more boxes a company checks off, the more likely it is to be a winner.