3 Growth Stocks That Could Propel Your Wealth

Growth stocks can be big money makers but some require more luck than others. Investors should focus on the long-term wealth creators.

| More on:
Growth from coins

Image source: Getty Images

Investors invest in growth stocks for price appreciation. What drives that price appreciation is high growth in earnings.

In non-registered accounts, booked capital gains are favourably taxed at half of your marginal tax rate. For example, if you live in Ontario and are in the highest tax bracket, your work income is taxed at 53.53% this year, but your realized capital gains from price appreciation will only be taxed at 26.76%.

So, growth stocks can propel your wealth, because they’re tax deferred until you sell. And when you do sell at a profit, they’re taxed at a lower income tax rate.

Here are a few kinds of growth stocks you may be interested in.

Large-cap stock

Some large-cap stocks are growing at an above-average pace. For example, Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) has outperformed the Canadian stock market, using iShares S&P/TSX 60 ETF as a proxy, in the last three, five, and 10 years.

The graph below illustrates the difference in wealth creation of a $10,000 initial investment over a decade. In the period, BAM stock created about $28,300 more in wealth. BAM’s 10-year return equated to about 17% per year versus the market’s 9%.

BAM.A Total Return Level Chart

BAM.A Total Return Level data by YCharts

Going forward, the global alternative asset manager has plans for long-term growth. One big change that’s expected to complete by the end of the year is that it’ll be splitting the company between its proprietary assets and the asset management business. This should bring more simplicity and greater flexibility for management to create long-term shareholder value.

BAM’s cash flow multiple has actually contracted about 40% in the past decade. So, it could be substantially undervalued. Analysts think it’s discounted by about 19-26%. Ultimately, it means there’s a high probability, it can deliver annualized returns of at least 12% over the next decade.

Smaller-cap stocks

BAM’s market cap is about $103 billion. Smaller-cap stocks that maintain sustainably growing profits can generate even greater wealth for investors. For example, goeasy’s (TSX:GSY) market cap is about $2 billion. It has also beat the market in the last three, five, and 10 years.

The graph below displays the difference in wealth creation of a $10,000 initial investment over a decade. GSY stock created about $230,680 more in wealth in the period than the market. GSY stock’s 10-year total return equated to about 38% annually versus the market’s 9%.

XIU Total Return Level Chart

XIU Total Return Level data by YCharts

As the leading non-prime Canadian consumer lender, goeasy’s products and services will always be in demand from a percentage of the population. The company has also made strategic acquisitions to expand its offerings and accelerate growth.

For example, in June, it announced an investment of $40 million for a minority stake in Canada Drives, Canada’s largest 100% online car shopping and to-your-door delivery platform. This investment was easily covered with about 22% of the company’s trailing 12-month earnings.

The growth stock appears to be fairly valued versus its long-term normal valuation, but the analyst consensus 12-month price target suggests a discount of 37%. This translates to a potential upside of almost 60% in the near term!

Cyclical stocks

Highly cyclical stocks can be huge money makers, but perhaps some luck is required in picking a low buy point and a high sell point. For example, in 2020, Baytex Energy (TSX:BTE) hit a rock-bottom price of below $0.50 per share. Who would have guessed that it could trade at $7.12 today? An initial $10,000 investment would have transformed into more than $142,400.

Pundits believe that energy prices will remain relatively elevated in the near term. Therefore, they also believe energy stocks can head higher. In particular for Baytex stock, pundits have an average price target that represents upside of about 27%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has positions in Brookfield Asset Management Inc. CL.A LV and goeasy. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV.

More on Investing

Cogs turning against each other

Recession Risk: Turn to These 2 Defensive Stocks for Your TFSA

As the probability of a recession increases, adding defensive stocks like Fortis to your TFSA will limit your downside.

Read more »

Silver coins fall into a piggy bank.

RRSP Investors: The Easiest Way to Save Cash in 2023

There's a super-simple way to save money each and every year, and that's by putting money directly into your RRSP.

Read more »

Modern buildings in business district
Dividend Stocks

3 REITs Offer a Good Mix of Growth Potential and Dividends

The real estate sector in Canada is still heading downwards, and the stocks are mimicking the pattern, so you can…

Read more »

potted green plant grows up in arrow shape
Dividend Stocks

2 of the Best Dividend Stocks to Buy for Growing Passive Income

If you're building a long-term portfolio, these two dividend stocks are some of the best investments to buy for growing…

Read more »

edit Woman calculating figures next to a laptop
Dividend Stocks

Create $500 in Tax-Free Passive Income With $0 in the Bank

Even if you don't have a cent to invest, you can start creating passive income to allow you to create…

Read more »

Plant growing through of trunk of tree stump

2 of the Best TSX Growth Stocks to Buy in October

One has to be extra careful while picking growth stocks in this rising-rate environment.

Read more »

Bank sign on traditional europe building facade
Bank Stocks

2 TSX Bank Stocks Worth a Long-Term Bet Right Now

Here's why Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Royal Bank of Canada (TSX:RY)(NYSE:RY) are two top bank stocks to buy now.

Read more »

Dividend Stocks

Passive Income: 2 Dependable Dividend Stocks to Buy Today and Own Forever

Now’s a great time to think about building a passive-income stream. Here are two dividend stocks to have on your…

Read more »