How to find the best growth stocks in 2023

Zaven Boyrazian explains what he thinks are the most important factors for identifying winning growth stocks for his portfolio today.

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.

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'

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.

sdf

Growth stocks haven’t been terrific performers of late. These companies tend to have the most long-term potential, which leads to far loftier valuations compared to already mature industry titans.

As such, when market uncertainty creeps in, volatility surrounding shares trading at a premium is usually far higher.

But with the macroeconomic environment starting to become clearer and the British economy beginning to settle, investor confidence is on the rise. As such, investors are beginning to take a second look at growth-oriented companies for potential bargains in the aftermath.

After all, buying a high-quality business at a fantastic price is a proven recipe to make money, especially when recovery tailwinds are blowing.

The question is, how can investors find these wealth-changing opportunities?

Growth vs value

A growth stock isn’t difficult to spot. These are companies that are typically younger, offering a novel product or service that is in rapidly rising demand. With most capital being allocated towards internal investments and marketing, it’s not uncommon for these businesses to be unprofitable. But this added level of risk is often offset by high double, or sometimes even triple levels of revenue growth.

Where things become trickier is creating value. There are plenty of businesses capable of growing sales. But few actually find a path to profitability before the money eventually runs out. That’s why so many unprofitable high-growth tech firms are now struggling to stay afloat, leading to massive job cuts across the sector.

But not every business is in this basket. There are a few generating sufficient free cash flow to maintain and expand operations.

One example from my portfolio is MongoDB. The cloud database platform is still hiring in 2023 despite most of its competitors hitting the pause button. How? Because the cash-generative nature of its products makes the group far less dependent on external financing to stay alive. That gives management far more flexibility as well as the opportunity to steal market share.

What to look for

As I just highlighted, free cash flow is one of the first things I look for when evaluating the financials of a growth enterprise. A firm capable of generating more money than it spends accelerates the growth story and the journey along the path to profitability.

However, it’s not the only important trait. Beyond achieving top-line growth, I like to see high levels of liquidity on the balance sheet. These are assets that can be quickly converted into cash to meet short-term obligations. It also provides an emergency fund for corporations undergoing temporary market disruptions, whether it be internally or externally.

Debt is also another factor to consider. It’s less common to see among unprofitable enterprises, but loans can be problematic when close to maturity. A company already being squeezed by unfavourable market conditions could land itself in even more hot water if a bunch of outstanding debts become due.

And while management teams often have the option to refinance, doing so today would likely be at a much higher interest rate versus a few years ago.

Obviously, these aren’t the only factors that determine a good or bad growth investment. And there are countless qualitative characteristics to consider, such as competitive advantages. But filtering out the stocks that financially fall short can quickly eliminate subpar investments from consideration.


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.

Zaven Boyrazian has positions in MongoDB. The Motley Fool UK has recommended MongoDB. 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

Businessman with tablet, waiting at the train station platform
Investing Articles

See how much a 50-year-old should invest to get a £1k monthly passive income at 65

Even at 50, there's still time to build a big enough stocks portfolio to generate a serious passive income at…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

With P/E ratios below 7, are these undervalued FTSE shares bargains — or value traps?

Low valuations aren’t always the bargains they seem. Mark Hartley takes a closer look at two FTSE shares trading at…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 simple strategies that can help drive success in the stock market on a small budget

Christopher Ruane runs through a trio of strategic moves he reckons can help an investor as they aim to build…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

2 growth stocks backed by this British fund that’s soared 77.8% in just 3 years!

Our writer likes the look of this under-the-radar fund, especially with a pair of exciting growth stocks near the top…

Read more »

Shot of an young mixed-race woman using her cellphone while out cycling through the city
Investing Articles

Is there value in Baltic Classifieds — a soaring growth stock that brokers are buying?

Baltic Classifieds has surged after broker upgrades. Mark Hartley asks whether this FTSE 250 stock is really worth buying now.

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£20k in an ISA? Here’s how it could be used to target £423 of passive income each month

Earning money from dividends in an ISA is one way to set up passive income streams. Our writer explains how…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

Which is better: £100,000 or a second income of £5,481 per year?

Dividend stocks and government bonds are both worthy ways of earning a second income. But which is a better choice…

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

With interest rates falling, dividend stocks could be the key to passive income between now and 2030

In the years ahead, dividend stocks are likely to offer far more potential for passive income than savings accounts, says…

Read more »