Famously, a common pitfall of ordinary traders is to buy the dip and ignore the stocks going from strength to strength. It’s just so tempting to buy stocks that have sold off in the hopes of making the big returns while ignoring those powering higher from one day to the next.
If we turn our attention to those stocks that have been going higher this year, we can track down at least 36 candidates up 30% for the year. But what’s the common theme among them all and how do you find the next big opportunity?
Credit: David Cox
Key Points
- Focus on areas like artificial intelligence and biotechnology where investor attention is strong. Look for stocks with high revenue growth rates.
- Look for companies with strong competitive advantages like network effects, scale, or high switching costs, exemplified by Meta, Amazon, and Shopify.
- Manage risk by maintaining a diversified portfolio to balance high-growth stocks with stable investments.
How To Spot Great Ideas
To find similar opportunities, one key metric to focus on is buzz. It’s clear for example that AI buzz has it all-time highs and that’s where opportunities lie. That’s how stocks like Nvidia cross your radar.
Next look for stocks with high growth. Revenue growth is a critical indicator and companies with high compound annual growth rates in sales tend to outperform their peers. Notable examples include Tesla, Shopify, and Nvidia, which have shown impressive 3-year sales growth CAGRs ranging from 24% to 39%. More important than past growth though is the potential for those revenues to soar long into the future.
Usually the top stocks will also have strong competitive moats. These can include network effects, scale advantages, or high switching costs. For instance, Meta’s Facebook benefits from network effects, where the platform’s value increases as more users join.
Amazon’s vast fulfillment network provides a scale advantage that is difficult for competitors to replicate. Shopify’s e-commerce platform creates high switching costs, making it challenging for merchants to switch to other providers.
Find Market Leaders
It’s rare to find stocks that are growing rapidly with wide moats that are not leaders. For example, Nvidia is a leader in semiconductors, Netflix is a leader in streaming entertainment, and Amazon in e-commerce and cloud computing.
Investing in companies that are industry leaders means persistently higher growth rates are more probable because they tend to be the most well-capitalized and so can invest in new disruptive ideas early – look no further than Microsoft investing in OpenAI – or they can acquire companies on the cusp of massive growth – see Facebook’s acquisition of Instagram and WhatsApp.
Usually, these companies operate in large and expanding markets also. For example, the increasing adoption of cloud computing services has opened new growth avenues for Amazon Web Services.
If finding individual stocks seems like a challenging predicament, consider a diversified exposure to these emerging opportunities via ETFs like the Vanguard Small-Cap Growth ETF (VBK).
One caveat to this approach is to pay attention to the fact that high-growth stocks often experience significant price swings. The best-performing stocks of 2024 have seen dramatic increases, with some rising over 200% year-to-date as well as massive drawdowns. So you’ll often need to ride the up wave by holding onto the seat of your pants during the big dips too.
To know whether you’re onto a winner, look to non-conventional metrics. Growth stocks may not always appear attractive on traditional valuation metrics like price-to-earnings ratios. Instead, factors such as revenue growth rates, market share gains, and potential for future profitability are crucial drivers.
Above all, pay attention to the high risk associated with these stocks and maintain a diversified portfolio. Balancing high-growth potential stocks with more stable investments is arguably the best way to manage risk and ensure a more resilient investment strategy.