Are you looking for an investment approach that targets future leaders before they get big?
It’s not an easy thing to do. However, if you diversify, it’s not a crazy thing to try to do either.
By buying and holding diversified portfolios of relatively small high-growth companies, you can earn very satisfying results. In fact, you can at times beat the market. In this article, I will explore the investment approach that makes it possible to do this starting with as little as $5,000.
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Growth investing
Growth investing is an investment approach that centres around buying and holding fast-growing companies. The logic behind it is that companies that are growing sales and profits quickly will also see their stock prices appreciate quickly. Sometimes it works out, other times it doesn’t. Generally speaking, if you want to get into growth investing, you’re best off buying a growth ETF that holds a number of such stocks.
One good example of a growth ETF is the iShares Core Growth ETF Portfolio (TSX:XGRO). It’s a Canadian ETF that holds other ETFs, mostly Canadian and U.S. growth ETFs. In the portfolio, you will find many different types of growth stocks, from U.S. big tech giants to Canadian small caps. The fund does a pretty good job covering the North American growth landscape. In exchange for that diversified exposure, the fund charges just 0.18% in management fees. It has a 0.20% management expense ratio (MER), which is all expenses including management expenses and execution costs. There is some ‘doubling’ of fees at play with this fund, as it holds mostly other ETFs. However, given iShares’ low fees, I doubt the total fees on average are much more than 0.3%. So, XGRO could be worth a look.
Examples of growth stocks
As I wrote above, it’s best to get your growth stock exposure in the form of an ETF rather than individual stocks. The reason is, individual stocks are risky, and growth stocks are among the riskiest of the bunch. In such a market, diversification is key. So my official recommendation is still, “use ETFs not individual stocks.” However, it’s still worth exploring some individual growth stocks, to show what growth companies look like.
Constellation Software (TSX:CSU) is a good example to work with here. It is a well-regarded Canadian growth company run by venture capitalist Mark Leonard. Over the last five years, it compounded its revenue at 23%, its earnings at 17%, and its free cash flow (FCF) at 36% annualized. In the last 12 months, the revenue growth was a little slower, but the earnings and FCF growth rates were far higher than in the trailing five-year period.
How has Constellation managed to maintain this consistently high growth over such a long timeframe?
It comes down to a few basic characteristics. First, CSU is modestly sized for a listed tech company, with a $100 billion market cap. Second, CEO Leonard likes to buy profitable (at least revenue-positive) companies rather than gambling on “ideas” like some VCs. Third and finally, the company integrates acquired companies into its own operations, seeking synergies. It all adds up to a fast growing, highly profitable powerhouse. That’s the kind of thing you want to look for in a growth stock.
