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Growth Stocks: An Overview Into Risk-Heavy Investing

Published 09/13/2022, 06:34 PM
Updated 07/09/2023, 06:31 AM
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For investors who do not mind taking a little risk and are already growing tired of the ins and outs of traditional investments, growth stocks are becoming attractive alternatives to pump the adrenaline of investment daredevils out there.

Growth stocks are any share in a company that is expected to grow at a rate significantly higher than the average market growth. They perform best when interest rates are falling and company earnings are rising. However, they become vulnerable when the economy begins to decline, and the cheap money that can fuel fast growth becomes more challenging to find.

But despite the current state of economies, many growth companies managed to prosper and made it through various economic hurdles that the past two years presented. Case in point, Amazon (NASDAQ:AMZN) saw its stock price grow 65% from 2020 to 2021 to $2,008.72 from $3,313 at the height of the COVID-19 pandemic.

Like any other investment, it does not automatically mean that significant risks bring big rewards. Managing growth stocks, after all, are all about risks, but these risks pay off as long as investment cards are played right.

Growth Stocks Overview

Growth stocks generally do not pay dividends because their owners or investors are usually companies that plan to reinvest any earnings to speed up their growth further.

This makes the stocks risky investments because the only avenue for return is by selling the shares at the right time. Investors generally inject capital into growth stocks if they are more or less certain of capital gains once they sell the shares in the future.

Some common characteristics of growth stocks are they tend to have unique product lines. To stay ahead of competitors, these companies reinvest profits for developing even newer technologies they patent to guarantee longer-term growth.

These companies usually also have a loyal customer base and a significant market share in their particular sector. Growth stocks are not exclusive to one sector. They cover various industries and are present worldwide.

Some Of The Best

In addition to Amazon, other growth stocks to have emerged in recent years include Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX).

The three best growth stocks in September 2022 in terms of EPS growth are American Airlines (NASDAQ:AAL), Marriot Vacations Worldwide (NYSE:VAC), and Equitable Holdings (NYSE:EQH). Each of their EPS grew 2,170%, 1,880% and 1,840% during the month.

In terms of sales growth, the best three are Coterra Energy (NYSE:CTRA) with a revenue increase of 693.8%, Quidel Corporation (NASDAQ:QDEL) with a 247.3% improvement in revenue and Synnex Corporation (NYSE:SNX) with its 160.7% sales hike.

It is not enough, however, to just look into growth companies' sales and earnings performances. When choosing a growth stock to invest in, it is wise to also look for companies with competitive advantages, which during recent turbulent times marred with the pandemic and high inflation have been great identifiers of resiliency.

These advantages are network effects, scale advantages, and high switching costs.

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