Successful investors like Lord Lee, who was the UK’s first known ISA millionaire, focus their investing strategy on growth. Companies with particularly strong growth trajectories are often AIM-listed. AIM is a key growth-focused market and since 2013, its shares have been eligible to be held in ISAs, which opens up many more high-potential companies for an investor to choose from.
So how do I start to look for the best such companies on the stock market? I take these three things into account.
1. Management holdings
This is an important one because when management holds a significant proportion of shares in the company they run, their interests are aligned with yours. When a company is in huge growth mode, often the founder will still be involved so should have a large holding.
On top of that, a fast-growing company should be able to boost its share price, so why wouldn’t management want to have a slice of the pie? It’s a red flag for me and for many renowned investors when management doesn’t want to be in the same boat as the investors they rely on. It’s also good to see big institutional investors among the biggest holders of the shares.
2. Dividend Growth
When it comes to growth investing, the rate of dividend growth is more important than the headline dividend yield. This is because companies that are growing fast will often want to redeploy more of the profit they make back into the business to then keep growing. In the long run, this should be a positive for investors, making the current yield less important.
That being said, you do want to see some form of dividend being paid to shareholders as its a good indicator of profitability and management’s confidence in the business. But don’t expect the kind of hefty yields that income-focused investors buying FTSE 100 shares are used to.
3. Consistent financial growth
Another financial measure that you as a growth investor want to be looking carefully at is growth in sales and operating profit. Again you want to see year-on-year rises that are consistent or, better still, are expanding faster now than in previous years. Revenue and profits that are up and down are not good news for investors because they could mean the company is struggling to sell its service or product, or to keep control of its costs.
The best-growing companies can nearly always show good progress year after year and the annual reports will often present these figures as a bar chart going back several years. In fact, the annual report is a good place to find information about a company’s historic performance in general.
Year of growth?
Even with Brexit looming, this is expected to be a year of growth (some analysts have tipped the usually-quite-staid FTSE 100 to end the year above the 8,000 mark, which would be a new record). If you as an investor hold fast-growing companies and a wider stock market rise happens, it could be a particularly rewarding year.
Andy Ross has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.