Top Notch Progress Shares to Invest in during December 2024's Market Expansion
Diving into the stock market's growth sector can lead to life-changing riches. The trick, naturally, is determining which growth stocks to buy and when.
In 2022, numerous growth stocks endured substantial losses. While the renowned S&P 500 index plummeted over 19%, the S&P 500 Growth index suffered a 30% annual decline. Some growth stocks experienced even more significant setbacks, with share prices being slashed in half or even two-thirds. But in 2023, growth stocks staged a comeback, outpacing the broader market and strengthening their position throughout 2024. There might still be potential for them to surpass further.
This guide should help you begin your journey into investing in growth stocks. By employing these tools and strategies, you can construct a portfolio designed for long-term prosperity in the growth stock market.
What is a growth stock?
Exploring Growth Stocks
Growth stocks encompass companies whose earnings expand at a higher pace than the sector average or market growth as a whole. Growth investment, however, is more than just selecting rising stocks.
Often, a growth enterprise has developed a groundbreaking product or service that is capturing market share, entering new markets, or even kickstarting entirely new industries. Markets usually reward firms capable of growing at a faster pace for an extended duration, rewarding shareholders with impressive returns in the meantime. And the faster they grow, the larger the potential returns.
Unlike value stocks, higher-growth stocks tend to carry a premium in terms of profitability ratios, such as P/E, P/S, and P/FCF. Despite their costly tags, top-performing growth stocks can still deliver fortune-making returns to investors when they fully realize their tremendous growth potential.
Growth stocks can be quite volatile. They took a hit in the market in 2022, but they recovered slower than the overall market, despite impressive performances in 2023.
High inflation can put pressure on growth stocks, reducing the future value of their anticipated earnings. In addition, supply chain constraints impact some companies' capacity to expand, while other macroeconomic factors hinder the entire economy. However, downturns provide ample opportunities for long-term investors to buy when growth stock prices are low.
Top growth stocks
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High-Performing Growth Stocks
I've compiled a list of top growth stocks for you, offering some illustrative examples.
Automotive
| Company | 3-Year Sales Growth CAGR | Industry || --------------| ------------------------| ---------- || Tesla (NASDAQ:TSLA) | 22% | Automotive || Shopify (NYSE:SHOP) | 19% | E-commerce || Block (NYSE:SQ) | 11% | Digital payments || Etsy (NASDAQ:ETSY) | 6% | E-commerce || Nvidia (NASDAQ:NVDA) | 53% | Semiconductors || Netflix (NASDAQ:NFLX) | 8% | Streaming entertainment || Amazon (NASDAQ:AMZN) | 10% | E-commerce and cloud computing || Meta Platforms (NASDAQ:META) | 10% | Digital advertising || Salesforce.com (NYSE:CRM) | 11% | Cloud software || Alphabet (NASDAQ:GOOG), (NASDAQ:GOOGL) | 10% | Digital advertising |
This list highlights the diversity of growth stocks, which can be found in various sectors, ranging from local to international markets. Although you'll see larger companies on this list, small businesses can also offer promising opportunities for growth investors.
A smart way to invest in numerous small-cap growth stocks is by utilizing an exchange-traded fund (ETF) like the Vanguard Small-Cap Growth ETF (VBK -0.34%). This fund mirrors the performance of the CRSP U.S. Small Cap Growth Index, giving investors a convenient way to invest in approximately 580 small-cap growth companies at once.
Notably, the Vanguard Small-Cap Growth ETF carries a minimal expense ratio of 0.07%. This means investors will receive almost all the fund's returns, with very little allocated to fees (an annual expense ratio of 0.07% equates to roughly $0.70 in fees for every $1,000 invested annually).
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Pursuing Growth Stocks
Discovering Growth Stocks
E-commerce
To locate outstanding growth stocks, you should:
- Recognize enduring market trends and identify the companies well-positioned to capitalize on them.
- Reduce your list to companies with significant competitive advantages.
- Further refine your list to firms with substantial addressable markets.
Identifying Trends
Spotting Market Trends and Companies Driving Them
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Companies that capitalize on powerful growth trends can enjoy sustained sales and profit growth for many years, generating wealth for shareholders in the process. Here are some examples, along with the companies that can help you profit from those trends:
- E-commerce: With more individuals shopping online, companies like Amazon, Shopify, and Etsy are prospering within the U.S. (and numerous international markets). In Latin America, MercadoLibre (MELI -2.94%) holds a significant share of the online retail market. Despite the prevalence of brick-and-mortar retail, e-commerce still possesses significant growth potential as an industry.
- Digital advertising: Meta (formerly Facebook) and Alphabet (proprietor of Google) control a significant portion of the digital advertising market. As marketing budgets shift from traditional channels to online sources, these companies stand to benefit financially. Amazon has also developed a substantial advertising business, which continues to expand into new formats. Even Netflix has embraced advertising as a means to increase its subscriber base and enhance its revenue.
- Digital payments: Block (formerly Square) is facilitating the global transition from cash to digital payment methods by enabling businesses of all sizes to accept debit and credit card transactions and making cashless payments more accessible to consumers.
- Cloud computing: Computing power is moving from on-site data centers to cloud-based servers. Services from Amazon and Google's cloud infrastructure assist in this migration, while Salesforce.com (CRM -0.3%) provides top-notch cloud-based enterprise software. The growth of artificial intelligence (AI) will necessitate large amounts of computing power, which cloud providers are prepared to offer.
Digital payments
Cloud Computing
Cloud computing represents a network of interconnected servers and data centers working together to deliver services via the Internet. * Cord-cutting and streaming entertainment: An increasing number of individuals are canceling their cable subscriptions and opting for less expensive and more convenient streaming alternatives. As the leader in streaming entertainment, Netflix takes advantage of this trend; however, it faces intensifying competition from other media organizations.* Electric vehicles: The world is transitioning from gasoline-powered vehicles to electric vehicles (EVs). Half of all auto sales could potentially be EVs by 2030, according to industry executives. Tesla is the front-runner in this sector, with its line of vehicles and battery technology.* AI: Companies are investing heavily in AI technology and integrating it into their operations. Nvidia has benefited greatly from this trend, as it designs the chips used to train numerous large language models (the foundation of generative AI). Alphabet, Amazon, and Microsoft (MSFT -0.08%) also prosper from the expansion of AI applications, as they offer cloud computing platforms on which much of this technology is based. Salesforce is leveraging its position in enterprise software to help businesses use their data to create AI-powered agents.
The key is to invest in these trends and companies as early as possible to maximize profits. These trends have the potential to last for many years or even decades, offering ample time to reap the profits they generate.
Competitive advantages
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Focus on companies with competitive advantages
It is also essential to invest in growth companies that possess solid competitive advantages. Without strong competitive advantages, these companies may be surpassed by their competitors, and their growth may be short-lived.
E-commerce
Competitive advantages become particularly important during challenging times, such as during a pandemic or periods of high inflation. A robust competitive advantage can help companies endure and flourish during market downturns, while those lacking a competitive advantage may struggle.
During 2022, we saw a significant sell-off in many tech-focused growth stocks. The share prices of numerous top growth stocks were reduced by more than 50%, but some of the biggest stock market losers in 2022 turned out to be the biggest winners in 2023.
If you can identify stocks of companies with strong competitive advantages that are being sold off along with the rest of the market, it can present an opportunity to generate substantial returns as they recover. Some competitive advantages include:
- Network effects: Meta's Facebook is a prime example of a company with strong network effects. Each new user increases the value of the platform to other members. Network effects can make it challenging for new entrants to surpass the current market leader's market share. Meta's 3 billion users across its family of apps make it unlikely that a new social media company will displace it.
- Scale advantages: Size can also be a powerful advantage. Amazon is a strong example in this area as smaller competitors will find it difficult to replicate its extensive global fulfillment network.
- High switching costs: Switching costs are the expenses and effort involved in switching to a rival's product or service. Shopify, which serves as an online retail platform for more than 1 million businesses, is an excellent example of a company with high switching costs. Once a company begins using Shopify as the core of its online operations, it is unlikely to go through the hassle of switching to a competitor.
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Ultimately, distinguishing between growth and value stocks revolves around two key aspects: the company's stage in its business cycle and its approach to allocating profits.
Growth stocks typically hail from emerging markets or small to mid-sized businesses. These companies are often in the early to mid-stages of their growth cycles, which implies a higher risk profile due to the uncertain nature of their trajectory. Their main focus is on reinvesting earnings in the business to fuel expansion and growth, rather than providing shareholders with dividends. Consequently, growth stocks often carry a premium in terms of valuation, and their value lies in the expectation of significant future earnings growth.
Semiconductors
Value stocks, on the other hand, are primarily large, mature businesses that are seen as trading at a discount (undervalued) or a premium (overvalued). These firms aim to generate returns for shareholders through both dividends and stock price appreciation. They prioritize allocating profits towards dividend payments and share buybacks, rather than reinvesting them in the business. As such, value stocks tend to have a more conservative growth trajectory and offer a more stable income stream to investors.
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Finally, you should consider investing in businesses with vast markets to tap into — and expanding growth potential still on the horizon. Industry reports from research firms, such as Gartner and Insider Intelligence, can provide valuable insights, including market size estimates, growth projections, and market share data.
Larger opportunities translate into larger future growth potential for businesses. And the earlier in its growth cycle a business is, the longer it can potentially continue to thrive with impressive growth rates.
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FAQ
Growth Stocks FAQ
Streaming entertainment
What are growth stocks?
Growth stocks represent shares in businesses that are expected to increase revenues and earnings faster than their industry average or the broader market. They commonly trade at high valuations and experience more pricing volatility compared to average stocks.
Which growth stock will boom in 2024?
The stocks projected to surge the most in 2024 are those that surpass market expectations. By outperforming, these stocks will likely experience escalating stock prices.
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Can you provide an example of a growth stock?
Amazon is a prominent example of a growth stock. Its shares often appear overvalued according to traditional measures like price-to-earnings and price-to-sales ratios. However, the company consistently invests in expanding its offerings and market presence. Its long-term growth potential is substantial.
E-commerce and cloud computing
What are the top growth stocks?
Small, growth-oriented companies with distinctive competitive advantages in large or emerging markets are usually the best growth stocks. These firms are typically expensive relative to their peers but justify their elevated stock prices due to their impressive upside potential.
Expert Q&A on Growth Stocks
Dr. Preston D. Cherry, PhD, CFP
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Assistant Professor of Finance and Personal Financial Planning at the University of Wisconsin, Green Bay
What's your advice for finding high potential stocks like growth stocks?
Digital advertising
Finding high-potential growth stocks requires analyzing metrics that suggest current growth and indicate a sustainable growth pattern. Companies must demonstrate a unique product or service within their sector, serving as a competitive moat. Consideration should be given to historical increases in earnings, profit margin evaluation, and technical chart trend characteristics, along with analysts' forward-looking growth and price projection assessments.
Are growth stocks risky?
Investing in individual stocks carries inherent risk factors, including market and business risk. Growth stocks, specifically, tend to hold higher risk due to their growth phase. Smaller companies with unproven track records typically invest heavily in business growth, leading to increased stock price volatility and vulnerability to various risks. Despite the risks, growth stocks can offer substantial upside potential.
How can you distinguish between a growth versus a value stock?
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Growth and value stocks differ in key aspects, including company size, business stage, and profit allocation methods. Growth stocks are typically smaller companies in growth cycles, offering high risk and reward potential. Value stocks, on the other hand, are larger, more mature businesses that offer a stable income stream through dividends and share price appreciation.
Scott Stewart, PhD
Cloud software
Clinical Professor at Cornell University's Samuel Curtis Johnson Graduate School of Management, Cornell SC Johnson College of Business
How can you distinguish between a growth versus a value stock?
Growth and value stocks differ in their stage of business cycles and profit allocation methods. Companies in growth cycles, such as startups or smaller firms, focus on reinvesting earnings in the business to fuel growth. Value stocks, often large, mature businesses, aim to generate returns through dividends and stock price appreciation.
The Gordon valuation model serves as a useful instrument to distinguish between growth and value stocks. Proffessor Gordon's model, with a few simplifying assumptions, indicates that stock prices are equivalent to the following equation: next year's earnings (e) divided by (r - g), where "r" represents the discount rate and "g" denotes the growth rate. A lower growth rate necessitates a larger earnings figure for the same stock price. Conversely, a high-price-to-earnings (P/E) stock is associated with a high growth rate (by dividing both sides by e). These figures are influenced by investor expectations.
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Investors increase the P/E ratios of certain stocks due to their optimistic view of future earnings growth, even though current earnings may be low compared to market values. These types of stocks are often referred to as growth stocks. Tesla serves as an excellent example of a growth stock, with a 154 P/E multiple and a substantial 73% earnings growth rate (using data from Yahoo Finance).
Our Website: Are growth stocks risky?
Digital advertising
Note that a company's risk is factored into the discount rate "r." Companies with stable earnings typically warrant higher P/E multiples than those with unstable earnings, given equal circumstances. For instance, Clorox, a large-cap, stable-earnings company with minimal growth prospects (nearly 0% using Yahoo Finance data) still boasts a P/E of 30 (using the next fiscal year's earnings).
Research suggests that high-growth stocks tend to underperform low-growth, low-P/E "value" stocks over an extended period. For instance, the Russell small-cap Value index generated approximately 3% higher returns per year than its Growth counterpart over the 40 years up until 2019, with lower return volatility. One possible explanation is that investors overestimate the longevity of high-growth companies, as these "star" stocks often fail to meet their lofty expectations in the long run. However, there can be extended periods during which growth stocks outperform, like the 10 years up until 2020.
The theory and research suggest that the secret to selecting successful growth stocks is to identify those whose earnings growth rates will amplify in the short term (increasing the P/E and price) and maintain their strength in the long term (sustaining e growth and preserving a high P/E). For value stocks, some experts suggest choosing companies that have been neglected by investors (those with very low P/E or other multiples if e is negative), that are unlikely to fail in the short term and will recover in the long term. Not simple tasks!
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- In some cases, high inflation can put pressure on growth stocks, reducing the future value of their anticipated earnings.
- Due to their high growth potential, growth stocks can be quite volatile, but they can offer substantial returns to investors when they fully realize their growth potential.
