Your investment portfolio is a collection of the assets you own. These can be in the form of cash, real estate, bonds, stock, shares, or any others. A robust investment portfolio has viable assets with a high potential for appreciation and growth. Stocks and shares are possibly the most accessible assets you can buy and hold for an extended time. But before you dive into stock investing, you should know how to identify high-potential stocks. Here’s what you need to know.
What are High Growth Potential Stocks
Investing in high-growth potential stocks means identifying and purchasing shares of specifically vetted companies expected to grow at accelerated rates. These companies demonstrate metrics that indicate they can grow faster than most competing companies within the vertical. Although such companies can deliver significant returns because of their rapid growth, you should also be aware of the accompanying risk factors. So, how would you know which stocks are ideal additions to your investment portfolio? Read ahead to find out.
Low-Potential Stocks for Your Investment Portfolio
Before discussing high-growth stocks, let’s check out the other end of the spectrum. Although most investors focus on picking out top-notch companies, some may stake their investment on the possibility of a downtrend and a drop in share prices. Using this strategy carries a high risk, and it’s preferable to experiment with it only if you’re an expert. A good example is the short NVDA.
What happens here is that investors borrow stocks from a broker at their current market value. They anticipate that stock prices will go down further. They sell the borrowed stock at its current high value and then purchase it when the prices drop. That’s how they hope to make a profit.
Identifying High-Potential Stocks–What to Look For
Whether you’re relying on the advice of an expert investment consultant or doing your own research, pay careful attention to the target company’s metrics. Here are some of the vital questions to ask.
Are the Revenues Higher than the Industry Average?
For starters, you’re particularly looking for revenues that are much higher than the average across the industry. Next, check the numbers released by the company on public forums. If the high revenue growth is consistent year after year, that’s the stock to purchase.
What is the Return on Equity? Or Earnings Per Share?
Yet another crucial metric is earnings per share or the return on equity (ROE). Companies typically offer returns each quarter, every six months, or per year. However, they may make additional payments if they have had an especially good year and earned higher revenues. If you’re evaluating the company in terms of percentage, an ROE of up to 20% is a great return. This figure can also go up to 25%, depending on the specific vertical. A great strategy is to do a comparative analysis of the top-ranking companies and then make your choice.
How does the Company Stack Up Against Competitors?
This should be your next question. The key focus areas should be brand value and the uniqueness of its products. A brand backed by patent protection, robust intellectual property, and intangible assets is ideal for your investment portfolio. Also, compile information about the company’s research and development projects. If it is consistently working toward innovation and new products, that’s the company you want to back.
What is the Company’s Market Share?
You could assess the market share the targeted company has captured and its customer reviews and feedback. A dedicated customer base, brand loyalty, and low churn rates are good indicators that the company is stable and worth backing.
Is the Industry High Growth?
Certain companies should make your investment portfolio simply because of the industries they operate in. You’re looking for sectors like information technology, cybersecurity, gaming, health and life sciences, edtech, and renewable energy—also, target companies working in eCommerce and the circular economy.
How is the Company’s Financial Health?
A company could generate high revenues and profits, but it’s advisable to scratch below the surface and look at its overall financial health. Check out its cash flow statements and working capital. You should also examine the cap table for the equity-to-debt ratio. Higher equity is good, but debt can be tricky because the company could be paying high amounts of interest on loans.
Who are the Top Executives in the Management?
A company’s ultimate success or failure always depends on the caliber and expertise of the top management and C-Suite executives. Research the background of the people running the company, paying particular attention to their track records with successful companies. Read up about their qualifications and accomplishments–particularly how they handled crises and downtrends.
Identifying high-potential stocks for your investment portfolio is easily done when you know what to look for. Pay careful attention to these metrics and criteria and then make an informed choice. Your portfolio is sure to appreciate over time.
