After a challenging time, things may be looking up for growth stocks in 2023. Inflation has eased and there’s a chance interest rates could decline later this year—which should help growth companies rebound from their doldrums.
If you want to profit from that trend, keep reading. You'll learn all about growth stocks and meet 18 stocks that may have a role to play in your portfolio.
Understanding Growth Stocks
What are growth stocks? Growth stocks appreciate faster than their peers and the overall market. Amazon (AMZN) is a classic example. The e-commerce and cloud computing giant has produced annualized returns above 20% over the last ten years. The performance handily beats the S&P 500’s return of roughly 12.5% in the same time frame.
Growth Vs. Value
Growth stocks are typically pitted against value stocks. Where growth stocks have high appreciation potential, value stocks have greater reliability. Growth stocks shine during periods of innovation and expansion, while value stocks show their worth in troubled times.
Going by the relative movements of the Wilshire U.S. Large-Cap Growth Index and the Wilshire U.S. Large-Cap Value Index (as retrieved from FRED, Federal Reserve Bank of St. Louis), the dominant eras for large growth stocks include the late-1990s, the 2010s and March, 2020 through November, 2021.
As you might guess, the windows of dominance for small- and mid-cap growth stocks have been smaller. For example, large growth stocks remained strong for much of 2021 before going soft near year end. These larger companies had a rough 2022 but look to be strengthening so far this year. Small-cap growth stocks, on the other hand, lost their momentum earlier in 2021 and continue to struggle.
Volatility In Growth Stocks
The ebb and flow in the popularity of growth stocks demonstrates a key theme of growth investing: Growth stocks can be volatile because they are sensitive to the investing climate. When investors feel optimistic, growth stocks reign supreme. When investors are nervous about the future, value stocks—perceived as safer—usually do better.
Volatility isn't all bad, however. It goes hand-in-hand with the potential for market-beating returns.
Characteristics Of Growth Stocks
The characteristics that differentiate growth stocks from value stocks include high revenue growth, strong projected earnings growth, low or no dividend yield, experienced leadership, and premium pricing.
High Revenue Growth
Growth companies often show stronger revenue increases than their peers and the overall market. This can be the result of the company holding a dominant position in a fast-growing industry or entirely new market.
As an example, search engine Google created the internet advertising business in 2001, when it launched Google AdWords. Between 2002 and 2006, Google revenues rose from $400 million to $10.6 billion.
Strong Projected Earnings Growth
Growth companies plan to achieve big earnings increases, even if they are not yet profitable today. Remember Amazon's slow roll to profitability? The company went public in 1997 and didn't show a full-year profit until 2003.
Low Or No Dividend Yield
Growth companies spend their cash on growth strategies, not dividends.
The skill of the leadership team can make the difference between a promising idea and a profitable business model. Growth companies that live up to investor expectations have savvy, experienced leaders.
Growth stocks carry a premium price tag, which shows itself in high price-to-earnings (P/E), price-to-book and price-to-cash flow ratios. This means investors are willing to pay more to own a company that can ramp its earnings and cash flow quickly.
How To Identify Growth Stocks
You can identify growth stocks first by researching younger market segments with massive growth potential. A relevant example today is the artificial intelligence (AI) space.
Next, look within that segment to find the dominant players. In AI, for example, Nvidia (NVDA) and Taiwan Semiconductor (TSM) stand to benefit from a ramp in the adoption of AI technology. From there, you can review the companies' revenue growth trends, look at the track record of the leadership teams and evaluate the growth strategies.
Perform this exercise for NVDA and TSM and you'll conclude that NVDA fits the growth profile better than TSM.
You can also shortcut this process by reviewing the top holdings of high-performing growth ETFs and mutual funds. For example, the ten largest positions in the large-cap Vanguard Growth ETF (VUG):
- Alphabet Class A (GOOGL)
- Alphabet Class C (GOOG)
- Home Depot (HD)
If you prefer to invest in smaller or midsize companies, you can begin your search with, say, SPDR S&P Mid Cap Growth ETF (MDYG) or iShares Morningstar Small-Gap Growth ETF (ISCG).
Advantages And Disadvantages Of Investing In Growth Stocks
Like any investing strategy, growth investing isn’t a one-size-fits-all approach. Be sure you are comfortable with the advantages and disadvantages of growth stocks below before you start trading.
The advantages of growth stocks are:
- Growth stocks have strong appreciation potential.
- Growth stocks with an enduring competitive advantage can continue outperforming for many years.
The less appealing features of growth stocks include:
- Growth stocks are usually more volatile than value stocks. You’ll see the value of your growth stock portfolio swing up and down, which can be stressful.
- You will pay a premium to buy a growth stock, since they typically have high price-to-earnings (P/E) ratios. If the stock doesn’t live up to expectations, you have more to lose.
- Growth stocks generally have low or no dividend yields. Without a dividend, your returns hinge entirely on stock price appreciation. Appreciation is easily dampened by outside factors, such as the economic or financial market climate.
Top Growth Stocks To Buy Now In April 2023
If you're new to investing and looking for the best stocks to buy for 2023, lean into the megacap growth stocks listed above. Apple, Microsoft, Amazon and their peers are reputable companies that should deliver strong growth over time.
If you already hold those stocks—say, in an S&P 500 fund—consider diversifying for your growth exposure. The table below introduces eight analyst-recommended, large and mid-cap growth stocks. Each has grown revenues and EPS by 20% or more over the last year.
This list is a starting point to kick off your research. Dive into each company to evaluate the leadership team, growth plan, industry opportunity and competitive advantage.
Growth Stock FAQs
What are growth stocks?
Growth stocks are shares in companies that you expect to grow faster than the overall market. These companies typically reinvest earnings to drive expansion and generate greater returns for shareholders.
How do growth stocks differ from value stocks?
Growth stocks and value stocks differ in their growth potential and their approach to shareholder returns. Growth companies pursue market-beating revenue and earnings increases to drive stock price appreciation. They employ several strategies to achieve that growth, including innovative product expansion, geographic expansion and acquisitions.
Value stocks are undervalued by the investor community, as evidenced by a low P/E ratio. They also pursue growth, but in a more tempered way. Rather than funneling most of their available cash flow into expansion initiatives, value companies also pay dividends and buy back shares. These efforts return value to shareholders in the short term.
Value stocks often make for the best dividend stocks, however, because there’s also long-term appreciation potential. A truly undervalued stock will eventually experience gains as investors realize the company’s worth.
What are some characteristics of growth stocks?
Growth stocks have strong revenue and earnings growth, dominant market share, innovative products or services and a solid, savvy management team. In terms of metrics, they typically have high P/E ratios, high price-to-book ratios and low dividend yields.
What are some strategies for identifying growth stocks?
One way to find investable growth stocks is to research high-growth markets. Then identify key players in those markets. You're looking for the company that has a clear advantage over existing and future competitors. You should dive in further to assess the company’s revenue growth trends, outlook and leadership team.
Alternatively, you can review the top holdings of high-performing growth ETFs and mutual funds to find growth stock prospects.
What are the advantages and disadvantages of investing in growth stocks?
The primary advantage of growth stock investing is the potential for higher returns and long-term growth. The trade-offs you accept for that potential are volatility, more risk and minimal dividends.
What are some top growth stocks to buy now?
Some of the more popular growth stocks to buy now include megacaps like Amazon, Apple, Tesla and Nvidia. Investors like these big companies because they are among the more reliable growth options.
Consider your own risk tolerance before you invest. If you want growth with less risk, lean into large-caps. If you don’t mind risk in exchange for potential, toe gently into mid-caps or small-caps.