Today I have something special for you cause I will reveal one of my many investing approaches for finding high growth stocks in the market. I personally call the approach the “4 Quarters of the Growth Stock Search”. It is one of many strategies I use. This one is a long term orientated strategy, which is higly risky but gives you also a very high risk to reward ratio.
These are the requirements for finding adequate growth stocks with the 4 Quarters of the Growth Stock Search:
1. The company should still have a low market cap
That means that the market cap of the company should be at least about 500 Million and max about 10 Billion USD, which would be the size of a mid cap company.
That gives us more potential and room to grow the business in the aspect of its market share and market cap compared with heavy weights with 1 trillion and more market cap.
This can also help us to spot an investment that only few have on their trading sheets right now, because these stocks usually get less attention by investors and at this point of time there is less capital inflow in these businesses.
On the other hand you have to deal with the often high volatility during your holding period.
2. Must Have = Founder-run company
That just means that the Founder or even the Co-Founder is still the CEO of the company. That's important to me because it gives the extra kick and finess.
The Founder often has more passion for his business and if he is also financially involved in it he has to deliver, which distinguish him from a "standard" CEO.
That also often leads to less private equity in those firms which is another great aspect, because it gives the CEO more power of decision.
3. Of course we also need to see a massive growth rate
We look for high growth stocks so the sales growth has to be huge. Here we look for a sales growth from year to year which is at least bigger than 25% which should occure at least over the past 2 years.
Another important thing is that you don’t have to care about the profitability of the firm, cause in this stage of the business it should simply only grow. (But please keep in mind that this is only an approach by this strategy and overall it's important that companies make great earrings in the long term)
4. The last point is that we need to see a futuristic business model
That's also quite important, because with this strategy it's all about the vision of the founder, so which value the company wants to give its clients that other players can’t do.
Here you should also ask yourself why this firm is unique, what niche does it currently serve, and makes it so special. And it would be great if you understand the business model and be able to see an upcoming trend, which the company could then serve with its services.
If all 4 requirements are fulfilled you might have found a pretty decent investment.
But please keep in mind the following information while using a strategy like I do it.
You should hold your position just as long as you can. These are high growth stocks which means that if the stock for example doubles you shouldn't sell it, you should stick to the long term perspective and approach of this strategy. In good as well as in bad times.
This strategy is also not a kind of a "get rich quick bet", because you will see how this strategy sometimes will work out and sometimes not. But because of the decent risk to reward ratio you have a real advancement with this approach. That's also the reason why you should choose more than just one stock pick if you made your analysis.
And overall there are many cases where this approach already worked out very well.