In general, growth stocks are companies that are expected to have unusually high growth in their future sales and/or earnings.
Investors who buy growth stocks often believe the company will deliver strong financial results far into the future as it finds an ever-expanding market for its products.
We think there are actually two different flavors of growth stocks, and it’s very important to understand the difference between the two:
One type of high growth stock is when investors believe the company is going to grow very rapidly over the next 5-10 years and somehow substantially disrupt or take over an industry.
With story growth stocks, the price is often tied more closely to the belief that the company will have an incredible future than to the fundamental reality of the company today.
A good example of a story growth stock is Tesla (TSLA). The company has never turned a profit, carries $10B of debt, offers no dividend, and has unstable leadership (sorry, Elon - Elon Musk Sued By SEC: Beware of “Story Stocks” in Your Portfolio).
But their revenue growth has been incredibly strong (average of 95% growth per year for the last five years), so investors can envision a future where everyone drives a Tesla.
That future may come true, or it may not. But Tesla is a good example of a story growth stock where investors are betting on a future possibility.
Investopedia describes story stocks like this:
“A story stock is a stock whose value reflects expected outperformance (or favorable press coverage) rather than its assets and income. A story stock's share price is often bid up on overly optimistic expectations about its potential profits. Its valuations are generally out of line with its fundamentals, since investors will pay a premium for the shares to participate in its growth prospects.
Many story stocks are in the dynamic technology or biotechnology sectors due to the lure of purchasing shares of an innovative company that may discover the cure for cancer or invent a new fuel source.”
Story growth stocks can offer tremendous profit upside over the long term. But they can be fairly speculative and investors may have to wait a long time to find out if their vision will come true.
Story growth stocks often have a few risks associated with them:
Another flavor of growth stock is the steady growth stock. These stocks deliver steady above average sales and earnings growth year after year. They may not have an incredible future upside like story growth stocks, but they have found a formula for steady profitable growth and can often deliver through good times and bad.
A good example of a steady growth stock is Apple (AAPL). They have delivered an average of 8% sales and earnings growth per year over the last five years, all while buying back shares and boosting their dividend by 45% per year over the same period.
Does Apple have the potential to completely take over the consumer electronics industry and double, triple, or quadruple is size? No, that already happened. The stock has gained nearly 1,300% over the last decade (not including dividends) and already dominates the consumer electronics space.
So Apple isn’t really a story growth stock anymore, because investors don’t dream of an incredible future where the company has grown 10x bigger. But they’re a great steady growth stock with beloved products that are riding a wave of worldwide growth in demand for personal devices.
Let’s look at a few examples of both story growth stocks and steady growth stocks.
|Growth Stock||Company Name||Ann Sales Growth (5Y)||EPS (TTM)||P/E Ratio|
|GNL||Global Net Lease||513%||0.23||82.7|
Above are 15 stocks with incredibly strong sales growth over the last five years. You’ll notice that nine of them were unprofitable over the last 12 months. You'll also notice that most are in the biotechnology, pharmaceutical, or medical space.
All of these stocks may not be true story growth stocks, but they’re good examples of what happens when you seek out shares of companies with astronomical revenue growth.
Will they dominate their markets in 5-10 years? Who knows. Past research suggests that for every story growth stock that ends up being a "multibagger" there are many more whose returns greatly disappointed.
Let’s look now at some steady growth stocks.
|Growth Stock||Company Name||Ann Sales Growth (5Y)||Ann EPS Growth (5Y)||P/E Ratio|
Based on our proprietary stock research, these are 15 growth stocks with steady long term sales and earnings growth.
To be clear, we’re not recommending that you go buy these growth stocks now. While growth is important to consider when looking for the best stocks to buy, it’s critical to consider other factors as well (for example, value).
When it comes to growth stocks, both story growth stocks and steady growth stocks can deliver incredible profits over time.
Based on our research and experience, story growth stocks are more exciting, but steady growth stocks tend to deliver more often and much faster.
Data as of 10/11/18
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