It can be difficult for investors to decide which stocks to hold in a portfolio. This becomes especially true when looking at growth stocks. The reason growth stocks are harder to analyze compared to dividend stocks is because there are a lot more variables to consider. For instance, will the company be able to grow consistently over the next decade? Growth stocks often have less history for investors to read up on. Although stock picking can be difficult, there are common traits among stock market winners that investors should look out for. Here are three of those traits!
Look for companies that lead their respective industries
The first question investors should ask is, “Does this company lead its industry?” If a growth stock isn’t a clear leader in its industry, then it could have a difficult time gaining market share. This could result in growth struggles in the future.
Take Shopify (TSX: SHOP)(NYSE:SHOP) for example. It is a clear leader within the e-commerce industry. Although there are other notable companies in its sector, Shopify’s extensive list of customers is much more impressive than that of its peers. Shopify’s platform powers more than 1.1 million online stores around the world, including that of large enterprises like Netflix.
Is the company led by its founder?
Next, investors should prioritize companies that are led by founders. It has been found that founder-led companies tend to grow faster than companies led by non-founders. Therefore, if investors are ever in a position where two companies appear very similar in terms of investment appeal, I would suggest going with the company led by its founder. It’s important to note that this doesn’t necessarily require a founder to be the company’s CEO. Founders with large ownership stakes and hold other executive positions (e.g., president) should be considered as well.
Take Constellation Software (TSX: CSU) for example. Its founder, Mark Leonard, serves as the company’s president. He plays a vital role in the company’s direction and has been a large driver of Constellation’s growth over the past three decades. Until 2017, Leonard wrote annual letters to shareholders explaining the state of Constellation’s business. He has since decided to only write letters when important updates needed to be disclosed. As long as Leonard is involved with Constellation Software, I would be very confident in this company’s prospects moving forward.
Does the company have a history of growth?
Finally, investors need to look at the company’s growth history. If your goal is to hold the absolute best growth stocks, then you should be able to notice above average growth in the company’s revenue over the years.
Going back to Shopify as a prime example, investors can see that this is a stock with an exceptional history of growth. Through the four quarters of 2020, Shopify reported year-over-year increases in revenue of 47%, 97%, 96%, and 94%, respectively. Furthermore, since Q3 2016, Shopify’s monthly recurring revenue has never decreased quarter over quarter. In fact, over that period, its MRR has increased at a CAGR of 43%.
Taking growth measures into consideration, in addition to the other two traits mentioned previously, will help investors identify the best growth stocks to hold in a portfolio.
