Adding growth stocks to your portfolio
As the year comes to a close, most investors in global stocks will be happy to forget the financial situation in the markets year-to-date. Owing to the COVID-19 lockdown, inventory gluts, the devastation of the global supply chain system, and the conflict between Russia and Ukraine, the inflation rate has been at a 40-year high all year long. However, with 20 days worth of trading left for 2022, there may be hope that the worst is behind us according to the feds’ November FOMC minutes.
In the spirit of recovery, investors will be on the lookout for, among other trade opportunities, growth stocks. Growth stocks are stocks of a company expected to increase in profit and revenue faster than other average businesses in the same industry. Due to their typical young age, however, they offer a high-risk, high-reward type of investment.
Investors usually find growth stocks that do not make a profit currently. A company during its growing period spends on growth, and investors need to be patient as profits are expected in the long term. In this article, we analyze growth stocks and what you should consider before investing in them.
Evaluating growth stocks
- Returns on equity (R.O.E): This is the net income of shareholders’ equity as a percentage. High R.O.E shows a company spends a lot of its capital to ensure higher profits.
- Identify a trend: By identifying an emerging or dominant trend, for example, digitization which has been a trend for over fifteen years, growth stock investors can point out the company(s) that most benefits from this.
- Liability levels: In comparison to its competitors and its industry, a company should be at a reasonable debt level. Some companies try to grow their R.O.E by incurring debts, this should be a red flag to any investor because these growth stocks are usually short-lived and an investment hazard.
- Profit margins: Companies with gradually Increasing profit margins that hold this status for a long time are a sign of a good growth stock.
- Analysts’ opinions: Though not always correct, the projected growth R.O.E by analysts helps point out the market expectations for a certain stock and would be a fairly reliable guide to growth stocks.
Growth stocks to consider for your portfolio
Perion network stock
Perion network is an ad tech that deals with connecting buyers with sellers through their real-time bidding engine, intelligent hub. It also helps high-impact advertisers to provide a user-friendly experience with add-ins such as in-game advertising in live events with QR codes for scanning and connected to online carts.
According to reports by Meta and Alphabet platforms, online spending in digital applications has slowed down formidably and ad tech platforms have also taken hits but perion network has had strong growth in this same difficult situation. It has grown fast and increased by 30% to over 150 million dollars in market share in the industry.
Duolingo is an e-learning platform popular for easy and understandable language lessons. In 2021, after its initial public offering, Duolingo experienced a stock price peak which fell 66% despite its strong financial performance owing to economic factors affecting all competitors in its industry.
The expected rebound in the consensus price target is 58.9% higher than its recent stock price peak, making it the perfect candidate for a growth stock to consider.
Neighborly pharmacy stock
With the current market uncertainties, growth stock with some properties of defensive stock is rare to come by. Neighborly pharmacy, which deals in health care essentials is ideal for investors more so in a high inflation and high uncertainty level environment. In its latest 2nd quarter earnings report, it reported same-store sales growth (SSSG) for pharmacy revenue of up to 42% year over year.
However, the higher percentage of its growth has come from its continuous acquisition having added 275 pharmacies to its portfolio.
Once the prime stock, Amazon has had a rough year and shows it, by its almost 50% fall from its 2021 peak. Though some of its woes are said to be self-inflicted, analysts expect to see a fast rebound with a suggestion of a 51.2% gain for any stakeholders willing to be patient.
The trade desk stock
This adtech company showed off its great technology and positioning in the digital ad world, by surviving a crisis time when, with the U.S. and global economy weakened, ad spending was hard hit. The trade desk assists with the creation of digital ad campaigns designed by advertisers using its cloud-based platform.
The fintech stock formerly square, took a hard hit to its cryptocurrency trading operations as bitcoin lost 75% of its value. However, it still has a lot for any long-term investors.
The company’s square ecosystem, still its core profit driver is a working segment for traders to get pointers for trade, credit, and analysis statistics to assist in their business growth.
Block’s square ecosystem got a 50 billion dollars, gross payment volume (G.P.V) in a hectic 3rd quarter. This means from a 6.5 billion dollar G.P.V. in 2012 it jumped up to its current 200 billion dollars.
Some consider growth investing and value investing to be diametrically opposed approaches. Value investors seek “value stocks” that trade below their intrinsic value or book value, whereas growth investors—while they do consider a company’s fundamental worth—tend to ignore standard indicators that might show the stock to be overvalued.
Trending about growth stocks should be therefore done with high care, as the risks are also notably larger.