How to find the best growth stocks

By: Jonah Keri

Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes… read more.

Updated: May 28, 2021

One of the most popular investment strategies today is to buy growth stocks. This is because these are stocks of companies that can generate robust profits and big price gains by outperforming other investment options within their respective sectors. In this article, we’ll go into depth about what growth stocks are, and how to find the best ones..

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What are growth stocks?

A growth stock is the stock of a company whose earnings and revenue are growing faster than its peers in the same industry. Growth stocks might look overpriced if you analyse them solely based on typical price-to-earnings ratios, and this can indeed be true with some of the options available. But growth stocks are companies that reinvest their profits back into the business to generate further growth, which often causes those stocks to keep rising in price. If you find a growing company with a well thought out business plan, then the chances are you’ve found a growth stock worth investing in.

Typical characteristics of growth stocks

Growth stocks combine superior present-day earnings, revenue, and cash flow growth with expectations for robust future growth. That kind of fundamental strength gives growth stocks greater potential for big price gains in the future, which is what attracts investors to them. 

Are growth stocks a good investment?

Growth stocks can be a good investment, but it depends on circumstances. Certainly, a stock that demonstrates great earnings and revenue growth has excellent potential to make you money, but it’s important to take a close look both at the company you’re investing in and the prevailing market conditions. 

When a stock is riding high, there’s always the chance this is because it is overvalued and will fall soon, rather than keep growing because of solid fundamentals. Additionally bear markets can torpedo even the shiniest-looking growth stocks to the bottom, leaving you vulnerable to big losses, so you want to invest your money when the market is looking bullish.

How do I find the best growth stocks?

There are lots of ways to identify attractive growth stocks, and it’s important to do your research before making any investment. Here’s a list of different ways to find them, along with a more detailed explanation of each below.

1. Follow experts and use news aggregators
2. Look at what big players and wealth managers are doing 
3. Keep an eye out for trends and societal changes
4. Consider your own spending habits and the products you prefer
5. Use stock screening tools and set criteria

1. Follow experts and use news aggregators

Sites such as Bloomberg and Yahoo Finance offer excellent economic insights and company updates, so if that’s the kind of content you’re seeking, those are good places to start. We like to do things a little differently on Invezz, focusing on trading-based news and analysis that will help you become a better investor with the knowledge at your disposal. If you want up-to-the-minute updates on leading growth stocks such as Amazon and Google, we’ve got you covered.

2. Look at what big players and wealth managers are doing 

With all due respect to the little guys, it’s the biggest investors (often called “whales”) that make the market move. Whales consist generally of hedge fund, pension fund, and mutual fund managers as well as investment banks – the biggest of whom manage portfolios worth hundreds of millions or even billions of dollars. It’s helpful to follow what whales do since they’re often well ahead of the curve when it comes to finding the next great growth stocks, or can even create a growth stock simply by making very large investments.

3. Keep an eye out for trends and societal changes

As times change, new opportunities emerge for new companies to gain prominence and become enticing investment opportunities. For instance, the global trend toward plant-based eating has buoyed Impossible Foods, the company that makes the meat-free Impossible Burger. If you doubt the power of emerging trends and societal changes to boost a stock to new heights, think about how red-hot Netflix became once the home entertainment trend blew up and you’ll have your answer.

4. Consider your own spending habits and the products you prefer

Just as societal changes in spending habits can be a good indicator of future investment opportunities, your own habits can teach you a lot too. If you’re excited about a new fashion brand or a growing supermarket chain, you can always put your money where your mouth is and invest as the chances are you’re not alone.

5. Use stock screening tools and set criteria

You’ll find lots of stock screening tools and software online that allow you to sort stocks based on various different criteria. Since the goal is to identify top growth stocks, set your search to sort stocks based on their earnings and revenue strength and see how different stocks compare to each other. Yahoo Finance and Marketwatch are two of the best-known investing sites that offer those kinds of tools, but you’ll also find strong screening tools for growth stocks right here on this site.

Are there any risks I should know about?

When investing, there’s always a risk you could lose your money. Growth stocks are attractive to investors because they can deliver great gains over time, but a stock that’s already seen a supercharged price run can also become risky as there is further to fall if the stock turns out merely to have ridden a bubble that eventually bursts. 

Also, just because a stock is considered a growth stock doesn’t mean it’s guaranteed to perform as well as other growth stocks. For example, some leading retail growth stocks got hammered in early 2020 due to the COVID-19 global pandemic and lockdown. Consider those types of macroeconomic variables when selecting which growth stocks to invest in.

What should I do now? 

If you’re ready to invest, simply pick an online broker, select the growth stocks you want to buy, and make your purchase. Not feeling ready yet? No problem. Check out the many easy-to-understand trading courses and up-to-the-minute news updates that we offer to make sure you have all the necessary knowledge before putting your money on the line.