What sets brilliant growth shares apart?

Christopher Ruane explains a number of factors he considers when searching for growth shares he hopes can be the next big thing.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smiling white woman holding iPhone with Airpods in ear

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I have a range of both income and growth shares in my portfolio.

It can be easier to identify strong income shares, because often they have a long business track record. That can help me consider what they might be able to achieve in future, although past performance is not necessarily an indicator of what will happen next.

With many growth shares, though, a limited track record and sometimes undeveloped customer market can make it more challenging for me to decide how well I think they may perform in future.

Here are some things I consider when searching for potentially great growth shares I can add to my portfolio.

Market size

How big is the customer market likely to be for a certain product or service?

Ultimately that helps decide what sorts of revenues a company might be able to generate in future. I do not think great growth shares necessarily need a huge market. For example, Judges Scientific focuses on supplying technical instruments. That is a large market but not as big as the ones served by firms like Apple, for example.

But I do want to feel comfortable that the market is big enough and also wide enough that it could support a great business. Some growth shares have a business model that is largely reliant on a single key customer, for example. That is a business model laden with risk.

Smell check

I try to invest in businesses I understand. With growth shares, there can be new business areas that I need to research before I feel I understand them.

In doing so, I tend to apply a sort of smell check: what is my initial reaction to the business idea. For example, one of the reasons I have shunned Ocado shares is because I think the business model is closer to that of a commercial landlord than a tech company.

By building warehouses and distribution centres to service clients, Ocado’s business model strikes me as one that could have high capital expenditure costs and limited scalability. Its annual loss of half a billion pounds, announced today, was partly driven by a capex bill last year of almost £800m.

I feel similarly about Meta and its push into the metaverse. There may well be something in the metaverse as a future business idea. But for now it seems like a money pit with limited consumer traction.

Business model

Some businesses identify what they think might be a great area for future business growth. Renewable energy is a topical example.

But simply spotting where to dig for gold is one thing. Knowing specifically where and how to dig is another.

I think truly great growth shares benefit from a company having some unique competitive advantage. An example is the proprietary robotic technology of Intuitive Surgical. I do not own the shares because of the price, but I think the business itself is excellent.

So when looking at growth shares I could buy, I do not just focus on the market potential but also what sets a specific business apart from competitors over the long term. After all, if a business area genuinely is so promising, a lot of firms may be tempted to enter it. But typically there can only be a few really big winners.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. C Ruane has no positions in any shares mentioned. The Motley Fool UK has recommended Apple, Intuitive Surgical, Judges Scientific Plc, Meta Platforms, and Ocado Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »