Investing in growth stocks has been one of
the most profitable strategies over the last several year. By the end of this video, you’ll have an
easy strategy for finding growth stocks and the four factors I use for double-digit returns. In fact, researching for the video, I found
a growth stock that might just be my new favorite investment. We’re talking growth stocks today on Let’s
Talk Money. Joseph Hogue with the Let’s Talk Money channel
here on YouTube I want to send a special shout out to everyone in our community, thank you
for taking a part of your day to be with us. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. I love talking investing and this is going
to be a special video on investing in growth stocks online in partnership with The Motley
Fool. I’m going to walk you through my strategy
for finding great investment ideas and some factors I used as an equity analyst. Two of the most popular investing strategies
have always been growth versus value investing and they’re really at opposite ends of what
investors are looking for. Growth stocks are companies that are expected
to grow profits quickly over the next several years, this might be because they’re in
a new and growing industry or maybe the company itself has come out with an innovative offer. Value stocks on the other hand are usually
companies in mature industries or where profits are growing more slowly. Since stock investing is about your share
of those future profits, if profits aren’t expected to grow quickly, then these stocks
are usually priced cheaply. That’s in contrast with growth stocks which
are usually more expensive because investors expect those future profits to be worth more. Now historically, value investing has yielded
higher returns versus growth stocks. Nobel laureates Fama and French studied what
they called a value premium or that little extra return investors were making on value
stocks for like 30 years. The idea was that getting a good deal on these
value stocks was more important than the hope for higher profits on growth stocks. But that rule has broken down since the last
recession. Since 2011, growth stocks have easily beaten
value stocks. In fact, the S&P growth index has increased
12% annually over the last decade against a gain of just 8.7% annually for the S&P value
index. Besides the extra return, value investors
used to cling to the idea that growth stocks were more volatile and fell harder in a stock
market crash but that also hasn’t been the case. The growth index lost 42% in the last crash
while supposedly safer value stocks plunged 50% over the period. Now I’m not going to say totally turn a
blind eye to value and buy any stock with double- or triple-digit earnings growth. There’s actually a middle ground here where
you can get growth stocks at closer to value prices and get even higher returns. I’m going to show you some of the factors
I look for to getting growth stocks at a reasonable price as well as some resources online. We’re going to be using The Motley Fool
website for a lot of this because besides just a library of stock research and good
ideas, they have some solid stock screeners I use to find growth stocks. The Motley Fool has been around since 1993
which pretty much makes it one of the first online stock research sites. Now I used the Fool while I was an equity
analyst working with venture capital firms to keep up with news around industries and
stocks. The site publishes dozens of research ideas
and articles every day including deep analysis from analysts. For beginner investors, the website has an
entire section to get you started investing from what to invest in for different goals
and how to invest on different online investing platforms. Lately, The Motley Fool has really tried to
become a one-stop site for your personal finance decisions with this section on saving and
budgeting, taxes, mortgages and credit card advice. You find the answers to just about every question
about money here. But I want to show you how I find growth stocks
from screening for some of those factors to researching companies and investing. First though, I want to hear your ideas for
growth stocks. What’s your favorite growth company right
now or how do you find growth stocks for your portfolio. So scroll down and tell us in the comments. Just like when I was a sell-side equity analyst,
I keep my eyes open for news and developments in stocks through sites like The Motley Fool. I’ll check in on the website every few days
and read through some of the free articles. Growth investing is popular on the website
and in fact it has a newsletter called Motley Fool Rule Breakers devoted to growth stocks. So when you’re looking through articles
and research for growth stocks, you’re looking for companies with a first-mover advantage
in an emerging industry. Past growth is important here but you’re
really looking for that opportunity the company is using to grow sales and profits over the
next few years. We’ll use the example of Intuitive Surgical
here, a maker of robotics in the healthcare industry. By 2005, the shares had already jumped 500%
just in the last two years. This was a company that was revolutionizing
healthcare but the shares were trading for 42-times earnings so scaring off all the value
investors. But it went in the Rule Breakers portfolio
because of its competitive advantage in this emerging industry and the potential. Shares are now trading near $500 each after
a three-for-one stock split last year and a total return of 3,500% since 2005, that’s
a 32% annual return against a 7% annual return on the S&P 500. Beyond just looking for news and analysis
for growth stocks, I’ll also use a stock screener to find a short-list of potential
investments. There are more than 3,000 U.S. companies that
trade on the markets and many more foreign stocks so using a quick screener for important
growth factors is going to help us narrow the list down to candidates we can research
further. So I’ll click through to the Stock Screener
within Motley Fool Stock Advisor. You’ll see they have a lot of pre-defined
screens here that can give you some ideas. For example this Starter Stocks is a great
list of bellwether names, really best of breed companies in their industry that give you
a core portfolio for solid returns. I’m actually going to be talking about starting
investing and building a portfolio of these forever stocks, companies you can hold forever,
in our next video so make sure you subscribe to the channel so you don’t miss it. We’re going to go back to the screener though
because I want to use some of these filters on the left to find my own ideas for growth
stocks. There are quite a few criteria you can use
here to narrow your list. For growth stocks, I’ll start with high
or positive conviction here. These are stocks that the analyst has a high
confidence in the upside return, maybe the company has that strong competitive advantage
or management is on the ball. I’m also going to toggle on small-cap and
mid-cap here. Now that’s not to say that large companies
cannot also be growth stocks. Huge behemoths like Amazon and Netflix have
just exploded over the last couple of years but I would say it’s more likely for smaller
companies to grow faster for longer. Amazon is nearly a trillion-dollar company
and grew sales 31% in 2017 to $178 billion which is absolutely astounding but that same
growth is going to mean making $400 billion in sales by 2020 so those big numbers get
harder to hit. Instead I’m looking for scrappy smaller
companies that are hungry to grow and have a solid runway ahead of them. Finally here I want to toggle on this revenue
growth of 25% and 50% or higher to find those true growth stories. Now you could just go with the 50% growth
and higher but I want to keep my list a little larger and 25% sales growth is still very
strong. So that gives me 13 candidates for my growth
stock portfolio. If you click through you’ll find the most
recent analysis on the stock as well as an interactive chart. Now you can put these stocks in a portfolio
or you can add them to your watchlist and follow them a while. I like to look a little more into the financials
for each stock and compare them on 4 key fundamentals. This is going to include a deep review of
the company’s financial statements, it’s sales growth, debt and cash flow. I’m also going to be looking at management
and plans for the future. You can get all the financial statements and
usually an investor presentation for any company by doing a Google search for the company name
plus investor relations. So I’ll look first at a few things on their
financial statements. I’m looking at revenue growth and growth
in operating income on the Income Statement. I want to see that sales are growing but also
that operating income is growing quickly too and not that the company is spending so much
money to make those higher sales. I’m also going to look at the balance sheet
at total cash and long-term debt. A lot of growth companies will take on massive
amounts of debt to finance growth and then get into trouble if sales aren’t high enough
to make payments. Arista here has $1.5 billion in cash and zero
debt which is pretty amazing for a growth company. Finally, I’ll look at the Cash Flow from
Operations on the Cash Flow Statement. The income statement, those sales and earnings,
can actually be fairly easily manipulated by management to make the company look better. You see a lot of this because investors only
focus on earnings. Looking at the cash flow statement though,
this is actual cash in and out of the business, gives you a truer picture of growth. So we see that Arista Networks has grown cash
flow from operations nearly six-fold over the last few years and has been pretty consistent
in its capital expenditures, that’s the investment spending in the company. While I’m on the company’s investor relations
page, I’ll look for any investor presentations to download. This is going to give me a qualitative look
into management’s thinking and future plans for growth. I’ve got to tell you, looking through the
financial statements and a presentation for Arista Networks, I really like this stock
and will be adding it to my growth portfolio. Finding good growth stocks is a more than
just buying anything with higher sales growth but the whole process will take less than
a couple of hours and you’ll have a solid portfolio that can provide double-digit returns
for years. Check out that some of the research on The
Motley Fool for some ideas, I’ll leave a link in the video description below, and don’t
forget to share your ideas for growth stocks in the comments below. We’re here Mondays and Wednesdays with the
best videos on beating debt, making more money and making your money work for you. If you’ve got a question about money or
investing, just scroll down and ask it in the comments and we’ll answer it in a video.