A high inflation economy can provide unique challenges to those interested in day trading and longer-term investments.
From January to May, inflation grew from 7.5% to 8.6%, then took a sudden surge to 9.1% in June. Food and energy prices have soared, and inflation currently rests at its highest level for 4 decades in the US, and the UK has followed suit.
For investors, a high inflation economy can mean switching strategies. Commodities, inflation-indexed bonds, and real estate can all still make profitable investments. Real estate investment trusts, and investment in gold, perhaps through an EFT, might be a worthy consideration.
When it comes to stocks, normally value stocks would be a better choice when inflation is high, but there are some interesting, and promising, growth stocks worth looking at. The key is to understand which ones will thrive under this economy, and how to identify them.
What are growth stocks?
There are many reasons why individuals invest their money. It could be to diversify their income or to reduce the tax payable on said income. All investors though are hoping to grow their capital, and see a healthy return.
Growth stocks are those that belong to a business that is predicted to grow profits much faster than the average company in a similar or same field. For example, company A and company B are both in the ecotourism industry but company A is generating larger revenues much quicker. Company A could be identified as a growth stock.
When a business generates bigger than average profits, its stock value will increase. Growth companies typically have higher levels of retained earnings as they don’t concentrate on paying out dividends. Instead, profits are reinvested to continue their growth momentum.
This means investors in growth stocks shouldn’t be interested in dividend payouts but more focused on the rise in share value instead.
How can you identify growth stocks?
Growth stocks are often right at the forefront of new trends. Historically, this has shown to be ecommerce, technologies, and of course the dot-com boom of the late nineties. A company such as Amazon would be a perfect example of a growth stock even now. While most mature companies exhibit little growth, Amazon could perhaps be referred to as a safe growth stock.
A stock advisor service such as Motley Fool could be a very useful tool for identifying growth stocks. The Motley Fool’s stock picking service has been running for 20 years now and boasts a 491% return on its recommendations.
This is one of many stock advisor services, and a subscription is needed. However, with an ROI of 4-5 times the S&P 500, it could be considered a safer bet.
An alternative way to invest in growth stocks is through mutual funds, or with an exchange-traded fund. Growth stock mutual funds or ETFs save the time of choosing individual stocks and instead supply a group of growth stocks packaged together in one instrument.
What characteristics do growth stocks exhibit?
Identifying a potential growth company can be tricky, and these stocks are often volatile. Any sector that is poised for growth will potentially have businesses there that will be worth investing in.
But, there are other considerations to be had. How much growth is possible in their industry, and how large is their target market? Do they have the right leadership on board? How strong is the company’s sales growth, and also what debt levels do they have?
Growth stocks exhibit growing sales and revenues consistently over some time. Consecutive quarters should show sales growing consistently. As companies mature, growth tends to tail off, which is why growth stocks are not always suited to long-term investments, but neither are they for day trading.
Industries where you may find growth stocks include the following:
- Electric vehicles
- Ecommerce
- Electronic payments
- Cloud computing
- Digital marketing/advertising
- Remote work
- Streaming entertainment
All these areas are growth industries, although the latter is seeing some problems recently. Netflix is losing subscribers, and other smaller streaming services are requiring bailouts from investors. Soon though, it could be the lesser services fall to one side, and the dominance that Netflix showed before should return making them a safe growth stock.
Should you choose growth stocks?
For the amateur or more established investor, there are an endless number of tools and apps for trading today. Many of them provide a certain edge when it comes to particular stock trades. Automated crypto tools, and stock advisor programs, can all help to minimize the risk involved with trading.
You can view all US exchanges online at any time, and investing has never been so simple. But, it is still not always straightforward to find the best stocks to put money into.
Two key characteristics of growth stocks are risk and volatility. Some growth stocks are safer and can be used as long-term investments. If you had invested in Monster Beverage Corporation in 2002, you would have been looking at huge returns 10 years later.
Monster is often held up as one of the biggest growth stocks, and not surprisingly. A $10,000 investment in Monster in 2002 would have seen those same shares worth $2 million by 2012. Amazon, Starbucks, Apple, and Netflix, have all shown massive growth.
But, because growth stocks are judged so much by the company’s performance, a bad quarter can see the share value plummet. This volatility is what worries some investors. To go into growth stocks can take more nerve than value stocks need.
Some of the best growth stocks currently
The problem with any growth stock recommendation is that by the time you read this article, it may be that months have gone by. At the time of writing though, there were a few stand-out growth stocks that were catching many investors’ eyes.
This very website recommended Charles Schwab as a growth stock to buy and hold, and The Motley Fool agrees. Its reputation is extremely high, and it is considered a top pick at any time.
Other picks for growth stocks now:
- Adobe Inc.
- Salesforce
- Netflix
- Visa
- Global Payments Inc.
Adobe is worth looking at as its shares are down 28% in 2022. This makes it easier to invest and gives plenty of scope for growth as the company diversifies its products.
Netflix and Visa are two companies that dominate their markets with the latter seemingly unfazed by the electronic payment industry. Global Payments Inc. however has an all-in-on-payment platform that should see them continue their previous growth.
As for Salesforce, the CRM industry was worth $57.83 billion in 2021 and is predicted to grow at a CAGR of 12.5% until 2029. Salesforce has a nearly 20% share of the CRM industry currently.
When should you sell growth stocks?
The problem with growth stocks is that they can nose-dive. How long you choose to keep growth stocks could depend on your risk tolerance, and what your objective is. Are you looking to buy and hold in the belief that your stock is going to keep growing, or do you believe the company will plateau in a short space of time?
When your stock breaks out it is time to keep a close eye. The concern is if you sell too quickly you will miss out on future bigger profits. Many traders, therefore, look at selling some or all of a growth stock if it moves 25% past a proper buy point.
However, the main rule is to never panic sell. The best growth stocks have shown time and again the benefits of waiting, just look at Monster.
Summary
Finding the best growth stocks can take some work and a little research. Understanding the characteristics of growth stocks, and watching the sales growth over a few quarters can help to identify potential investments.
Stock advisor programs are helpful tools and these resources have often been proven to produce winning investments. If choosing your own growth stocks seems too much, and you are looking for a safer diverse way to invest then a mutual fund with growth stocks might be the answer for you.
