In order to boost their returns, investors usually tend to search for stocks of the companies that are likely to report relatively higher revenues and earnings in the future. The stocks that are expected to grow substantially above the average market rate are referred to as growth stocks.
In financial terms, the stocks of the companies that generate sustainable and significant cash flow (positive) and whose earnings and revenues are anticipated to improve at a faster rate than the average firm within the same industry, are categorised under growth stocks. The growth stocks are a riskier form of investments and are well suited for risk-tolerant investors eying for captivating returns.
Though growth stocks hold high potential to offer tempting returns, identification of the growth stock is a complex task. Considering this, let us discuss some strategies that can possibly help investors choose a growth stock.
One can look for the stocks of the companies having the following attributes:
Let us take a look at each of these attributes in some detail below:
High P/E Ratios
The ratio of a firm’s share price to its earnings per share (EPS) denotes its Price-to-Earnings (P/E) Ratio. Growth stocks tend to have a high P/E ratio that makes them relatively more expensive.
Below are the examples of some ASX-listed stocks with high P/E ratio:
Audinate Group Limited (ASX: AD8)
Audinate Group Limited’s (ASX: AD8) P/E ratio stood at 695.4 on 24th October 2019, with a share price of $7.32 and EPS of $0.011.
The company is the leading supplier of digital audio & video networking for the Professional AV industry. The company is driving the transformation of the AV industry via its multi-channel digital media networking technology, Dante, which is used in thousands of installations globally.
Kangaroo Island Plantation Timbers Ltd (ASX: KPT)
ASX-listed Kangaroo Island Plantation Timbers Ltd (KPT) reported a P/E ratio of 510.6 on 24th October 2019, with a share price of $2.45 and EPS of $0.005.
Kangaroo Island Plantation Timbers Ltd is the only listed timberland company of Australia that has made significant progress towards monetising its timber assets.
LogiCamms Limited (ASX: LCM)
ASX-listed LogiCamms Limited (LCM) has a P/E ratio of 133.3. As on 24th October 2019, the company’s stock price and EPS were recorded at $0.195 and $0.002, respectively.
The company is a leading mid-tier engineering, project delivery and operations services business executing work across Australia, New Zealand, PNG and the Pacific. It has a strong positioning in each of its service lines, including asset management, competency training, digital industry, electrical and instrumentation, multi-disciplinary engineering and pipelines.
Consistently Solid Earnings
As stated in the beginning, the stocks with consistent solid earnings are classified under growth stocks. It is being said that the stocks that have been delivering a rise in earnings year-on-year generally continues the trend further.
Let us take a look at one such company listed on the ASX whose profit and revenue have consistently improved year-on-year since it got listed on the ASX.
Bravura Solutions Limited (ASX: BVS)
Bravura Solutions Limited (ASX: BVS) has achieved significant milestones since its inception in 2004. The company is counted amongst the leading international suppliers of software and professional services for private wealth, superannuation, life insurance, pension, funds administration, investment and financial messaging.
The company has delivered strong revenue growth since FY16, with an improvement in its revenue from $184.7 million in FY16 to $257.7 million in FY19. The company also reported a rise in its net profit from a loss of $6.5 million observed in FY16 to a substantial profit of $32.8 million in FY19.
One can see from the above table that the revenue and the net profit of the company have consistently improved since FY16.
In its recently published FY19 annual report, the company reported outstanding results across all its key metrics and highlighted the following points:
- Wealth Management: Revenue and EBITDA up 14 per cent and 17 per cent, respectively, following new contracts, increasing project work, a number of go lives during the period and increasing demand from new and existing clients. The EBITDA margin increased to 30.5 per cent in FY19, reflecting the continued operating leverage expansion.
- Funds Administration: Strong EBITDA margins of 40 per cent in FY19, along with a revenue growth of 22 per cent. This was benefitted from increased implementation and project work arising across its client base.
- Tax expense: Recorded at $8.7 million, represented an effective tax rate of 21 per cent and reflected increased profitability across a number of jurisdictions.
Bravura holds a robust financial position, with a net cash of $194.8 million in FY19.
BVS closed the trading session at $3.78 on 24th October 2019, with a fall of 4.8 per cent compared to the last closed price. The stock has delivered a return of about 218 per cent since it began trading on the ASX.
Operating in a Growing Industry
The stocks of the companies that operate in the developing or growing industries are also categorised under growth stocks. This is because the growing industries improve the prospects of growth for the companies functioning in their arena. Some of the industries that are expected to boom further in the Australian economy include medical cannabis, technology, healthcare, construction, etc.
The market experts have noted significant prospects of growth for cannabis stocks after the cannabis products have been legalised for medicinal use by the Australian government. Some of the cannabis stocks listed on the ASX include THC Global Group Limited (ASX: THC), Cann Group Limited (ASX: CAN), Medlab Clinical Ltd (ASX: MDC), Elixinol Global Limited (ASX: EXL) and Creso Pharma Limited (ASX: CPH).
Stock Returns Higher than Benchmark Index
The stocks that deliver higher returns relative to the benchmark index over a period of time are usually expected to provide better returns in future. There are many stocks listed on the ASX that have delivered higher returns than the benchmark index S&P/ASX 200 in the last five years.
The S&P/ASX 200 index has provided a return of about 22 per cent in the last five years (calculated up till 23rd October 2019). The table below summarises the list of few stocks that have generated significantly higher 5-year return than the benchmark index:
The stocks that are considered very riskier generally hold significant potential to deliver high returns. The possibility of a major reward makes them captivating and attract investors towards themselves. Though investing in a stock market is itself a riskier task, stocks of the companies operating in some sectors carry a higher risk than the others. Few market experts believe that biotechnology stocks are riskier than others, though they have huge potential to make an investor wealthy in a shorter span of time.
Although investors can use these strategies to select their appropriate growth stock, there are a lot of other factors that need to be taken into consideration before making a prudent investment decision.