How do you spot a growth stock?
Here is what many people I’ve come across do: They look at stock charts. If they find a stock that has risen substantially in price, they would salivate. If the stock happens to rise further after they first spotted it, they would pour their money into it before something which is inevitable would happen: A crash in the stock’s price. Ouch. This is a classic example of how many investors lose money in the stock market.
True stock investors, the ones in the other group, take a different route in the stock market. To them, growth stocks are not simply stocks that have climbed by 100%, 200% or more in a short span of time. Rather, stocks that have potential to grow in price are ones that possess a track record of profits, have plans for future expansion of their businesses, and more importantly, have the financial resources to fuel their growth.
So, how can you find growth stocks? Personally, I turn to four basic documents to help me separate growth stocks from the rest which are not. They are:
1. Annual reports
If you have a habit of reading annual reports, you are already one step ahead of many investors who don’t bother to read them. Annual reports contain a wealth of information about companies that can help make true stock investors money.
In a company’s annual reports, the financial statements would reveal its past track record of profits while the Chairman’s Statement would reveal its ongoing projects and future plans for growth.
2. Quarterly reports
The purpose of reading annual reports is to find out the long-term past track record of a stock. Meanwhile, the purpose of quarterly reports is to tell us the recent business performance of a stock.
It allows us to discover the current financial strength of a stock so that we can assess whether it has the financial means to fund its operations or to continue paying out dividends to us in the future.
3. Press releases
In the case of many stocks, they would, from time to time, issue press releases on matters that are significant. To name a few, they include acquisitions, new joint ventures, the award of new contracts, or announcements on corporate exercises such as Rights Issues, Bonus Issues, Share Splits and Private Placements.
These matters would impact a stock’s financial results and thus, should be considered before investing in them.
4. Investor presentations
If you hate reading, there is still one last hope. Some stocks, especially the ones with a great investor relations (IR) department, would go the extra mile to prepare presentation decks.
These decks contain a summary or a snapshot of a stock’s past financials, present financial strength, and more importantly, a discussion of its outlook. Usually, I would download this document first before reading the annual or quarterly reports of a company. It is easier for me to consume written information in reports once I have a visual aid for the stock’s business performance.
What if you don’t want to read?
Unfortunately, most successful investors read a lot. If you don’t want to read, it’s best to keep your money in the bank. Please don’t invest in stocks.
Am I discouraging you from investing in the stock market? Nope. I’m just trying to be helpful so that you don’t get butchered in the stock market due to a lack of knowledge. So, keep reading!
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.