Investing in the best FTSE growth stocks has the potential to dramatically transform one’s wealth. And with markets looking distinctly grumpy at the moment, I’m more committed than ever to separating the wheat from the chaff. Here are just some of the questions I’ve been asking when selecting shares for my watchlist.
Best FTSE growth stocks: my checklist
#1. Does it have an edge on rivals? There’s little point in buying an also-ran. To achieve real growth, there needs to be a reason for customers/clients to flock to the business over others. If I can find one, it’s even better to own a company that has very few competitors.
#2. Is the valuation reasonable? Picking up a ‘bargain’ is a lovely feeling. However, the price should always be of secondary importance to how good a company is, in my opinion. In reality, it’s actually tough to find the best FTSE growth stocks trading on cheap valuations. The key is to ascertain what’s a reasonable amount to pay based on the outlook. An initially high-looking P/E isn’t necessarily a deal-breaker.
#3. Is there a pathway to growth? As a long-term Fool, I need to be confident that a company’s revenue and profits will improve in time. This could be achieved through the launch of new products or a move into new geographical areas. But if there’s nothing on the horizon, why buy?
#4. Is the track record good? It’s rightly drilled into us that past performance is no guide to the future. However, a rough rule of thumb I work to is that most winners, bar an enormous mis-step, tend to stay winners. Have the company’s fundamentals gone the right way for years? If so, I’ll probably be interested.
#5. What are the finances like? The last 18 months or so have shown just how important it is for a company to be financially robust. This is especially true with the best FTSE growth stocks since they’re still investing in themselves to reap the rewards later. As a result, I tend to buy stakes in companies with limited/no debt and avoid those with no margin of safety if things go wrong.
Naturally, there are quite a few caveats to this initial checklist.
First, even the best FTSE growth stock can still turn into an absolute dog of an investment if events work against them. A global pandemic springs to mind.
The key here is to accept the inherent uncertainty of it all. Investing rewards aren’t guaranteed and even the best in the business can’t predict the future. All I can do is try to increase the odds in my favour through detailed research and then seeking the best risk/reward trade-off in accordance with my financial goals.
Second, a great company can still take a while to perform as I want it to. That means being patient. It’s why, for example, I continue to invest in fast-fashion firm Boohoo even though its share price has sunk 44% in the last 12 months. This aside, I think it’s still doing all the right things.
Third, it’s worth emphasising that my initial criteria for what makes a great FTSE growth stock will differ from other investors. There wouldn’t be much of a market if everyone agreed on whether something was a buy or sell!