How can investors search for great growth stocks? You can check to see how stocks have been growing earnings over the last five years and make a short list.
If they are already growing strongly, they won't be secrets. Probably they will have high price/earnings (PE) ratios because buyers have moved in to get a piece of that growth and could make it a crowded trade.
That's why long-term investing is important. Not only can you see past short-term problems, you can also look to where the growth could be many years from now.
Let's say you buy a stock with a PE of 30, which may be much higher than the market average. However, if the company is growing earnings at 25% annually, you could justify paying the premium. A number of years from now, today's price might be seen as a bargain with sustained growth like that.
You can start a small position and keep watch for better business developments. If the story doesn't change or gets better, then add to the position. In addition, look out for buying opportunities like market sell-offs to top up your holdings.
I have two growth stocks that have good long-term prospects. They each have competitive advantages that can keep them strong and drive future earnings.
— Transurban Group (ASX: TCL)
The infrastructure company owns, operates and manages a large portfolio of toll roads and tunnels in Sydney, Melbourne and near Washington D.C. in the US. Toll roads by their very nature have strong advantages because no competing roads will suddenly pop up. Transurban will also be taking ownership of five of the six toll roads in Brisbane, making its three-city footprint solid and secure over the next 10 years and beyond.
It has a 41 PE now, but earnings are projected by some analysts to double potentially over the next two years. Road leasing agreements are for decades, so the company can build up substantial revenue over time.
— ResMed Inc. (CHESS) (ASX: RMD)
This company is a market-leading global developer and producer of breathing aid and respiratory devices. It derives about 97% of its revenue from overseas markets like North America and Europe where populations and healthcare markets are many times bigger.
It has a 20 PE, which isn't extremely high, yet analyst consensus forecasts are for earnings to grow about a compound 14% annually over the next two years. That's a good trade-off. Still, think about how much more the market for respiratory devices could grow over the next decade and the current $5.28 share price may look even more attractive.
