Three key factors to look for Growth stocks

Given the current turbulent economic environment wherein stock prices get impacted every now and then, growth stocks have gained a lot of attention in terms of sticking around and getting benefitted in the long run. The three key aspects to look at include:

Growth stocks could generate solid capital gains rewarding investors for the undertaken risk: Growth stocks can deliver better earnings as compared to the blue chip stocks. The growth stocks usually may pay smaller dividends, as the company typically reinvests retained earnings in capital projects. If the investor picks a good growth stock it has the possibility to multiply in value. Therefore, investors are thus willing to pay higher share price for the stock’s future growth potential. For instance, Retail Food Group Limited (ASX: RFG) generated over 671.71% in the last decade as compared to the S&P/ASX 200 index returns of over 12% (as of August 15, 2016). Still, the group continues to make its growth efforts. RFG further intends to grow its international segment to be 25% of total EBITDA by 2018. The company has reported 16.8% of EBITDA from its international operations as of its FY 2016 half-year results. Management maintained its full year guidance of net profit after tax growth of 20% year-on-year.

 

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RFG Five Year Returns versus S&P/ASX 200 index (Source: Financial Times)

Even, SEEK Limited (ASX: SEK) delivered over 230.34% in the last decade (as of August 15, 2016) and recently management reported about executing a successful Australian model at the global stage. For the six months ending December 31, 2015, international earnings have been reported to exceed domestic earnings. SEEK’s international operations witnessed revenue growth of 34% on a constant currency basis while earnings growth was 36% over the prior corresponding period. The company has forecasted a full year FY16 profit around $195 million before early stage global growth venture investments. With the print revenue migrating online SEEK has further opportunity to grow though volume and price increases. Automotive Holdings Group Ltd (ASX: AHG) is another such stock that has generated over 130.62% returns in the last five years (as of August 18, 2016).

Expanding Market Share: Growth companies generally expand their market share given their solid business expansion plans, and management focuses to expand earnings. For instance, Retail Food Group is the master franchisor of a collection of popular brands such as Gloria Jean’s, Donut King and Michel’s Patisserie. RFG’s Gloria Jean’s Coffees is a specialty coffee franchise with over 800 coffee houses worldwide. Similarly, SEEK’s online operations span across Australia, New Zealand, China, India, Brazil, Mexico, Indonesia, India, Nigeria, Bangladesh, Philippines, Vietnam, Thailand, South Africa, Kenya, Malaysia, Hong Kong and Singapore. The company estimates that its websites have exposure to 4 billion people or 30% of global GDP. In addition, Automotive Holdings Group Ltd (ASX: AHG) has multiple franchises at various dealerships and the company is continuously expanding by the acquisition of franchises.

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Competitive Advantage: A growth company may also hold some form of intellectual property (such as a patent) for a new and promising technology or product or have a history of being at the forefront of industry developments. This is the primary reason that growth companies do not pay out dividends as the companies’ goals are best served by reinvesting earnings into product research and development, thereby fueling expansion. For instance, RFG’s competitive advantage lies in the excellent quality of its products which shields price competition leading the group to gain higher operating margins than its peers. Moreover, SEEK is the digital leader on the ASX for online recruitment business. Seek dominates the Australian job search market and job seekers spend an ample amount of time online on Seek.com.au. Seek although has a threat from LinkedIn but low-skilled labor jobs which form the largest share of the Australian online job market are advertised almost exclusively on Seek, giving Seek a strong competitive advantage. Ainsworth Game Technology Limited (ASX: AGI) leverages from the technological advantages of its machines. The competitive advantage thus comes from the fact that punters like the flashiest machines. Ainsworth is focusing on the Americas and recently entered the Class II market in the U.S. by releasing its new A600 cabinet in early 2016. Further, the recent acquisition of Nova Technologies would help boost US revenues and profits. Then, Chairman Len Ainsworth move of selling his 53% stake in Ainsworth Game Technologies to global gaming giant Novomatic will help AGI deliver impressive growth. Similarly, AHG being the largest automotive retailer in Australia, provides better floor financing rates which reflects for cost advantage.

Thus, the growth stocks’ advantage is underpinned by strong fundamentals, barriers to entry and level of market penetration.

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