For years, growth stocks have been recipients of immense gains compared to average stocks. By nature, growth stock in a company is anticipated to grow at a rate considerably above the average for the market. Growth stocks usually do not pay dividends. The reason for this is because companies typically want to reinvest all earnings back into the company to accelerate growth in the short term. Investors then make money through capital gains when they ultimately sell their shares.
Since selling their shares is their only way of making money, growth stocks are often classified as risky investments. If the company does not do well, investors have to bear the loss on the stock at the time of sale. However, because of their inventions oriented style of operating, they often have a very loyal customer base or a substantial amount of market share in their industry.
As per Business Cafe, “While a stock priced on the lower side may have more opportunity and room for growth, the more expensive stock options typically provide a bit more security in the sense that they have a proven track record of steady growth.” 1
Finding the Best Growth Stocks
Currently, growth stocks comprise an array of technology, biotech, and some consumer discretionary companies. The best method for finding the best growth stocks – or the outliers – is by being on the lookout for unusual trading activity.
As per James Chen, “Growth stocks tend to share a few common traits. For example, growth companies tend to have unique product lines. They may hold patents or access to technologies that put them ahead of others in their industry. In order to stay ahead of competitors, they reinvest profits to develop even newer technologies and patents as a way to ensure longer term growth.”
One of the basic ways to fully understand a stock is looking at the near-term trajectory of a stock’s trading activity. The method in which a stock trades in the stock market can often highlight the forward fundamental picture a lot better than simply looking at a company’s financials alone.
Top 4 Growth Stocks
In our opinion, the top four stocks that are seen as long-term growth candidates include Chipotle Mexican Grill, Inc. (CMG), Ciena Corporation (CIEN), PagSeguro Digital Ltd. (PAGS), and Starbucks Corporation (SBUX).
- Chipotle Mexican Grill, Inc. (CMG)
Chipotle Mexican Grill, Inc. (CMG), is a leader in fast-casual Mexican dining and a fast-growing restaurant chain. Many technical aspects are considered before classifying a stock as a growth stock. These are the technical facets of CMG stocks that have grabbed the attention of experts a year to date (YTD):
- YTD outperformance vs. market: +58.65% vs. SPDR S&P 500 ETF (SPY)
- YTD outperformance vs. discretionary sector: +54.97% vs. Consumer Discretionary Select Sector SPDR Fund (XLY)
- YTD bullish and rare trading signals
Apart from the technical aspects, it is also important to look deeper to see if the fundamental picture is satisfactory to sustain a long-term investment. Below is the year over year growth of CMG:
- Q2 2019 YoY revenue growth rate: +13.2%
- Q2 2019 YoY diluted earnings growth rate: +91.7%
- Ciena Corporation (CIEN)
Ciena Corporation (CIEN), is a top networking company that has been growing consistently. Ciena Corporation stocks display bullish unusual trading activity. Out of the several technical areas used to determine if a stock can be termed as a growth stock, here are a few facts about CIEN that stood out to the experts:
- YTD outperformance vs. market: +13.52% vs. SPY
- YTD outperformance vs. technology sector: +1.33% vs. Technology Select Sector SPDR Fund (XLK)
- Latest bullish unusual trading signals
Ciena Corporation also has strong fundamentals for investors to think about when buying its stock as a long term investment:
- Q2 2019 YoY revenue growth rate: +18.5%
- Q2 2019 YoY diluted net income growth rate: +266%
- PagSeguro Digital Ltd. (PAGS)
Another growth stock to consider buying is PagSeguro Digital Ltd. (PAGS). It is a leading Brazilian payments company. The strongest contender for a long-term growth stock should display increasing volumes as the share price gains, meaning the number of shares or contracts transacted in a security or an entire market in a given period. The strengths of PAGS include:
- YTD outperformance vs. market: +136.02% vs. SPY
- YTD outperformance vs. Financials sector: +136.31 vs. Financial Select Sector SPDR Fund (XLF)
- Recent top-rated buy signals
PagSeguro also displays an impressive growth rate:
- Q1 2019 YoY total payment volume growth rate: +69.8%
- Q1 2019 YoY net income growth rate: +108.6%
- Starbucks Corporation (SBUX)
Starbucks is a leading retail coffee chain with shares that have been in bull mode this year. Technically, Starbucks Corporation (SBUX) has been impressive, which is why it has earned its place in our list of top growth stocks. Here are a few positive factors for Starbucks:
- YTD outperformance vs. market: +33.46% vs. SPY
- YTD outperformance vs. discretionary sector: +29.78% vs. XLY
- Recent uncommon buy signals
According to Zacks Equity Research, “Starbucks impressive share price performance can be primarily attributed to earnings beat over the past four quarters. Furthermore, the company benefited from a robust performance by the Americas and China-Asia-Pacific segments and store openings. Also, comparable sales from China increased for the third straight quarter. During 2019, the company expects to open 600 net new stores in the Americas.
Following the better-than-expected second-quarter results, Starbucks raised its fiscal 2019 guidance. GAAP EPS is envisioned to be $2.40-$2.44, up from $2.32-$2.37 projected earlier. Also, non-GAAP EPS is expected to be $2.75-$2.79, up from $2.68-$2.73 guided previously.” 2
On the other hand, Starbucks has also been showing a positive fundamental picture as well. Here is a picture of Starbuck’ growth in 2019:
- Q3 2019 YoY combined net revenue growth rate: +8%
- Q3 2019 YoY non-GAAP EPS (earning per share) growth rate: +26%
Shares of Chipotle, Ciena, PagSeguro, and Starbucks can be characterized as a potential buying opportunity of growth stocks for the long-term investor. Grounded in their sturdy historical revenue and earnings growth, and various top-rated buy signals from infrequent trading, these stocks could possibly be worth a spot in a growth-oriented portfolio in our opinion.
If growth stocks aren’t your thing, then check our recent blog on the best blue-chip stocks here.