How To Identify Growth Stocks from the FTSE 100 Index?

What are growth stocks?

A growth stock is a stock which is expected to grow exponentially in terms of its operational and financial performance in the foreseeable future and is expected to beat its comparative benchmark index in terms of capital gain returns. Growth stock companies generally tend not to pay dividends, as whatever they earn, is reinvested into the business. It is also important to understand that the investment in growth stocks could be very risky, primarily because of the lack of dividends, which can act as an alternative income or a hedge factor when the stock prices are going downwards.

Growth stocks generally have similar characteristics, such as unique product lines, patents on products and processes that give them an edge against their competition in the market, reinvestment of profits and their focus is always on the development of new processes, products or technologies that can allow them to increase their earnings.

Generally, these stocks tend to have high market shares and a loyal customer base, through which they leverage their growth. Â

Growth Investing vs Value Investing

Historically, when it comes to investments, there has been two schools of thoughts – Value Investing and Growth Investing.

Value investing was the term first coined by Benjamin Graham, in his book ‘The Intelligent Investor’. Value investing is a concept which deals in the identification of stocks with their fundamental or intrinsic value, while their prices on the stock market might not truly reflect this value. The concept states that in the longer run, the price of these stocks will tend to move towards their true value, as and when the entire market starts recognising their fundamental worth.

Another factor is that value stocks, generally don’t tend to concentrate on growth, and hence, these companies pay a dividend, which means that long term capital gains are not the sole focus of the investors of these stocks as they also take advantage of receiving consistent dividend income. These are comparatively less risky than growth stocks.

When talking about technical characteristics, growth stocks are generally more expensive and can have a higher price to sales as well as price to earnings ratios. On the other hand, the value stocks are considered to be comparatively less expensive and are considered to be cheaper.

If an investor wants a taste of both, there are hybrid or blended funds that give the investor exposure towards both kind of stocks, which allow a little more growth potential than just value stocks, while a little less risk as compared to vanilla growth stocks.

How to identify and pick FTSE 100 growth stocks?

In a bid to identify and invest into the FTSE 100 growth stocks, the investor needs to look for the constituents of the FTSE 100 index, with stocks having smaller market capitalisations within the index.

Another factor in the identification of growth stocks is to look out for the companies that are doing something new in each of their sectors. For example, software companies that are working on new products, which has the capability to change the way people live or the way businesses are done. For example, Amazon, a few years back started out an activity that changed the way customers shop. From 2008-2018, their stock surged to a new peak, giving its investors returns, they had never seen before.

Another factor is to look for companies that hold patents or are spending a lot on research and development. Patents will give them an edge against their competitors, which could be a huge growth driver for those companies. These stocks also generally keep reinvesting their earnings and cash into the business activities, rather than paying it back to its shareholders. This is an important feature of growth companies and can be used to identify growth stocks.

Other technical factors through which these stocks could be screened are factors such as projected earnings growth, lower debt to equity ratios, estimated sales growth, as well as the probability of wider geographical expansion.

After analysing some of these factors closely, the following stocks on the FTSE 100 index could be called potentially good growth stocks with a strong prospect in this new year, a year which is going to be an eventful one for the British Economy, as it would be in a transition phase post-Brexit, starting on 1st February 2020.

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Rentokil Initial Plc (LON: RTO) Stock Price Performance

As on 31st January 2020, at 9:30 A.M (Greenwich Mean Time), by the time of writing this report, the Rentokil Initial Plc stock was trading at a price of GBX 472.60 per stock on the London Stock Exchange market, an increase in the value of 0.34 per cent or GBX 1.60 per stock, as opposed to the price of the stock on the previous trading day, which had been reported to be at GBX 471.00 per stock. The market capitalisation (M-Cap) of the stock stood at a value of GBP 8.710 billion, with respect to the current market price of the stock of the company at the time of writing this report. The Annual dividend of the company was reported to be at GBX 4.67, while the annual dividend yield has been reported to be at 0.99 per cent. The company’s last ex-dividend date was on August 08, 2019. The company’s last dividend payment date was on September 11, 2019.

The beta of the Rentokil Initial Plc’s stock has been reported to be at 0.86, giving an idea that the movement in the stock price, is less fickle, as against the movement of the comparative benchmark index.

JD Sports Fashion Plc (LON: JD.) Stock Price Performance

As on 31st January 2020, at 9:33 A.M (Greenwich Mean Time), by the time of writing this report, the JD Sports Fashion Plc stock was trading at a price of GBX 827.40 per stock on the London Stock Exchange market, an increase in the value of 0.36 per cent or GBX 3.00 per stock, as opposed to the price of the stock on the previous trading day, which had been reported to be at GBX 824.40 per stock. The market capitalisation (M-Cap) of the stock stood at a value of GBP 8.023 billion, with respect to the current market price of the stock of the company at the time of writing this report. The Annual dividend of the company was reported to be at GBX 1.72, while the annual dividend yield has been reported to be at 0.21 per cent. The company’s last ex-dividend date was on November 28, 2019. The company’s last dividend payment date was on January 03, 2020.

The beta of the JD Sports Fashion Plc’s stock has been reported to be at 0.89, giving an idea that the movement in the stock price, is less fickle, as against the movement of the comparative benchmark index.

3I Group Plc (LON: III) Stock Price Performance

As on 31st January 2020, at 9:36 A.M (Greenwich Mean Time), by the time of writing this report, the 3I Group Plc Stock was trading at a price of GBX 1111.50 per stock on the London Stock Exchange market, a decline in the value of 0.76 per cent or GBX 8.50 per stock, as opposed to the price of the stock on the previous trading day, which had been reported to be at GBX 1120.00 per stock. The market capitalisation (M-Cap) of the stock stood at a value of GBP 10.898 billion, with respect to the current market price of the stock of the company at the time of writing this report. The Annual dividend of the company was reported to be at GBX 37.50, while the annual dividend yield has been reported to be at 3.37 per cent. The company’s last ex-dividend date was on December 12, 2019. The company’s last dividend payment date was on January 08, 2020.

The beta of the 3I Group Plc’s stock has been reported to be at 1.47, giving an idea that the movement in the stock price, is more volatile, as against the movement of the comparative benchmark index.

Comparative Share Price Chart of RTO, JD. and III

(Source: Thomson Reuters) Daily Chart as on 31-January-20, before the closing of the LSE Market

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