Unraveling the Intricacies of Growth Stocks
Growth stocks, typically delivering growth rates significantly higher than the stock market average, have the potential to be lucrative investments. Analysts predict an average EPS growth rate of 8.3% per year for S&P 500 stocks over the next five years. Yet, the top-performing growth stocks are currently exceeding this benchmark, with growth multiples two to three times higher or even more.
Despite their potential, many growth stocks experienced considerable dips in 2022 as the economy decelerated and interest rates surged, causing a notable dent in corporate earnings. Now, in 2023, the stock market is making a comeback, and numerous growth stocks are behaving more like value stocks, showing below-average price-to-earnings ratios for their category.
In this unpredictable terrain, Forbes Advisor has pinpointed 10 standout growth stocks based on their recent and projected earnings growth. Companies that consistently grow earnings and sales typically earn higher share prices over time. Furthermore, many of these are trading at their most attractive values in the past five years.
Distinguishing Characteristics of Growth Stocks
Growth stocks represent public companies achieving profits, revenue, or cash flow growth at rates that substantially outpace their rivals and the broader market. Investors gravitate toward growth stocks, aiming to capitalize on the rapid price appreciation they offer.
In general, growth stocks belong to smaller, newer companies disrupting their respective industries with unique products, services, and often, innovative technologies or intellectual property that gives them a competitive edge.
Growth companies tend to reinvest their earnings and leverage debt to scale quickly. They're often on a relentless drive to ramp up production, acquire other companies, and recruit new talent to facilitate swift business expansion.
Decoding Growth Investing
Growth investing is an investment approach focused on identifying stocks with a high potential for long-term business expansion. Growth investors place greater emphasis on a company’s prospective performance rather than current business metrics or market valuation.
This type of investing is usually viewed as a more aggressive investment style compared to value investing. Growth stocks typically shine during periods of low or decreasing interest rates and increasing corporate earnings.
Investors prepared to pay high price-to-earnings (P/E ratio) or price-to-sales ratios often back growth stocks, banking on these companies eventually exceeding their current valuation. However, growth stocks can be more volatile than the broader market, and investors frequently divest from these during periods of market uncertainty.
Risks Associated with Growth Investing
Because growth stocks usually factor in expectations for future growth, they tend to trade at high valuations. If a growth stock’s price already includes expectations for robust future growth, even strong revenue growth might fall short of investor expectations and trigger a sell-off. If growth begins to slow or stall, investors may simultaneously exit the stock, causing a significant drop in its price.
Growth stocks are also especially vulnerable to rising interest rates. Fund managers often use discounted cash flow models and assign a lower value to future cash flows when the discount interest rate is high. Therefore, the lower the discount rate, the higher future cash flows are valued today.
Growth vs. Value Stocks: The Comparison
Value stocks represent public companies that analysts and investors believe are undervalued based on their current business metrics. Conversely, growth stocks are companies projected to provide above-average returns in the future.
Value stocks are usually seen as low-risk, low-volatility investments, while growth stocks are riskier but potentially provide substantial returns over time.
Value stocks are believed to be undervalued at present market prices, while growth stocks, though potentially overvalued currently, are projected to grow and surpass their current valuation.
In terms of fundamental metrics, value stocks often have attractive low price-to-earnings (P/E) and price-to-sales ratios (P/S). Growth stocks tend to have high P/E and P/S ratios. Value stocks usually have profitable operations and pay relatively high dividends. In contrast, many growth stocks are unprofitable and do not pay dividends.
The following list details the ten best growth stocks of August 2023, with all meeting the following criteria:
- Each trades on a U.S. exchange
- Has a market cap of at least $500 million
- Trades at least 0.5 million shares per day on average
- Has robust future growth expectations with analysts predicting at least 20% annual EPS growth over the next five years
- Shows demonstrated historical growth trends, having grown earnings by at least 20% over the last year
- Is financially healthy, with a Morningstar financial health rating of A, B, or C
- Is not issuing shares to grow, with a buyback yield equal to 0% or higher over the last year
The Top 10 Growth Stocks of August 2023
|Company (ticker)||5-Year Avg. EPS Forecast|
|Planet Fitness (PLNT)||+197.7%|
|T-Mobile US (TMUS)||+65.5%|
|WillScot Mobile Mini (WSC)||+51.6%|
|ACM Research (ACMR)||+42.7%|
|Arcos Dorados (ARCO)||+42.6%|
|Match Group (MTCH)||+40.0%|
|Lamb Weston (LW)||+37.1%|
|Delta Air Lines (DAL)||+36.3%|
Investing in growth stocks can be an enticing prospect, given their potential to deliver substantial returns. While 2022 proved challenging for many growth stocks, 2023 marks a new chapter, with several of these stocks now behaving more like value stocks. Although growth stocks are inherently more volatile and carry a degree of risk, their capacity for rapid price appreciation can make them a profitable investment. Understanding their characteristics, the risks, and the fundamental differences between growth and value stocks can help investors navigate the financial landscape more effectively. Armed with this knowledge, investors can capitalize on the top 10 growth stocks of 2023, backed by robust future growth expectations and historical growth trends, and make informed decisions for their portfolios.