Your feedback is essential to help us improve - click here to take our 3 minute survey.

Here’s how to spot the best growth stocks

Here’s how to spot the best growth stocks
Image source: Getty Images


Is it possible to spot the best growth stocks? You know, the ones that will grow the most in the future? Unless you have a crystal ball, it’s tricky, to say the least!

The good news is that there are some basic principles you can use to spot a great investment. Let’s take a look.

Growth stocks stand apart

Companies with growth stocks stand out from the crowd. Tesla stock has grown by 2,915.66% in the past five years. That means that if you’d invested £1,000 five years ago, it would now be worth £29,156 – not a bad return!

The reason Tesla stocks have grown so fast is because of the unique nature of the company. It’s not just any old car manufacturer; it stands apart by creating innovative green technology.

According to Business Insider, although “most people know Tesla for its sleek and luxury electric cars and its eccentric CEO Elon Musk, … some may not know the electric vehicles are equipped with a plethora of features that you wouldn’t find in any other vehicle.” In total, they found 22 features that make Tesla cars stand apart from the competition.

Tesla is also one of the best growth stocks because it’s in a sector that’s growing fast. Government initiatives and green policies mean that there’s a great potential for the company to grow in the future.

Look for good value

Professional investors often look at the financial accounts of companies to work out whether they’re good value investments. This can tell them whether they’re likely to be growth stocks in the future.

The most common way to spot good value stocks is to measure a company’s price-to-earnings ratio or P/E ratio. It’s calculated by dividing the price of the shares by the earnings per share (profit divided by the number of shares issued). 

For example, imagine you buy shares in company A for £40 per share, there are 10 million shares in circulation and the company has a profit of £50 million. The earnings per share are £5 (£50m/10m) and the P/E ratio is 8 (£40/£5). That means you’d have to invest £8 to get £1 in profit.

Bear in mind that even if you find a company with a great P/E ratio, it doesn’t necessarily mean it will be one of the best growth stocks. There may be another reason the company has a low share price, such as a difficult market sector or bad news about the company.

Be sure to do your research and follow the famous investing saying: don’t invest money you can’t afford to lose!

Buy a value or growth fund

If you’re not sure how to pick the best growth stocks yourself, the good news is that there are ready-made funds you can invest in. Look for funds with ‘value’ or ‘growth’ in the title.

The benefit of investing in this type of fund is that your risk will be spread across many different companies, and you won’t have all your eggs in one basket.

Cast your net wide to buy growth stocks

Because it is so hard to spot growth stocks, some experts don’t even try. They work on the principle that if you cast your net wide enough, then you will automatically buy the stocks that will grow the most in the future.

The world’s most famous billionaire investor, Warren Buffet, recommends investing in a low-cost index fund. That way you’ll be invested in all the companies on the stock market. You’ll definitely have shares in the best growth stocks for the future.

Are you overpaying in broker fees?

Share dealing fees are not always straightforward. Use our free broker cost calculator to easily compare broker fees and see which providers listed offer the best value. 

Was this article helpful?
YesNo

Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.