A fintech stock typically offers financial services, or services to the financial industry, with a focus on using technology to gain efficiencies. Here’s how to spot the best ones.

A financial technology or “fintech” stock typically offers financial services, or services to the financial industry, with a focus on using technology to gain efficiencies. Fintech stocks are companies with upstart financial technologies—comparable perhaps to Uber or AirBnB.

The best fintech stocks have experienced rapid growth and are likely to continue to grow. Some may eventually become so successful that they start paying dividends. Investors should also scour a fintech stock’s balance sheet to glean any hints of hidden value like exceptionally high research and development spending, patents or other valuable long-term assets.

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Look for these indicators of growth in a fintech stock

The success or failure of any tech stock, including fintech companies, depends on a variety of factors. They may start out with a promising business plan. But it needs all sorts of things to prosper in the long run: the right employees, a favourable economic and regulatory climate, a favourable competitive environment, favourable research outcomes, adequate financing, perhaps the right merger partner or acquisition—the list is long.

One industry that grew a lot with fintech is the peer-to-peer (P2P) lending segment—online marketplaces that match borrowers with potential lenders. This segment has grown with the help of the growing online lending business. P2P loans are primarily used for real estate or small businesses, but may also involve car loans and personal loans. P2P lending is also expanding into the areas of insurance, crowdfunding, and mortgage financing.

What to look for in the best fintech stock investments

The best strategy for Successful Investors to invest in tech stocks includes—above all—finding companies that invest heavily in research and development.

Technology stocks have to treat their research spending as a day-to-day expense, much like salaries or taxes. So, research spending comes out of the current year’s sales, and it lowers the current year’s earnings.

As a result, many tech stocks’ earnings per share may look lower than those of stocks in other industries. But, in fact, taking out research spending, they are much more profitable than they appear. That causes some investors to overlook promising tech firms, or to see them as overpriced.

Research and development spending has the potential to pay off in dramatic long-term returns. That’s because the products that grow out of this spending will help tech firms increase their sales and profits over the longer term.

We see high research spending as an especially powerful ingredient for technology stocks that will profit from a global economic recovery. That’s because they’ll be ready with new and improved products that businesses and consumers will want to use when they increase their technology spending.

Bonus Tip 1: Investing in technology stocks over the long term

Long-term Successful Investor strategies aren’t built by making a fast dollar, or profiting from inside information. They are built over time, and most importantly, by learning how not to repeat the market mistakes of the past.

When possible, give your secure investments time to pay off and use our Successful Investor philosophy to pick stocks. Resist the ever-present urge to buy and sell. A sound portfolio, built through careful and safe investing, needs surprisingly few changes over the years, so you have fewer occasions to make costly mistakes.

Bonus Tip 2: Fintech stocks and Canada’s big banks

Recently, investors have begun to worry about Canada’s big banks once again. They fear the banks will lose out to fintech stocks. However, our view is that they will, in fact, probably wind up prospering in fintech, if not dominating it. That’s what happened in stock brokerage, insurance and other financial areas that they have entered in the past few decades.

We’ve long recommended that most Canadian investors should own two or more of the Big Five Canadian bank stocks—Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s mainly because of their importance to Canada’s economy.

Banks remain key lower-risk investments for a portfolio. As well, the big five Canadian bank stocks all have long histories of annual dividend increases.

We believe Canadian bank stocks are still well-positioned to weather downturns in the Canadian economy, contrary to pessimistic forecasts from some in the business media. These stocks trade at attractive multiples to earnings and continue to raise their dividends.

Additionally, we look for Canadian bank stocks with consistent dividends. One of the best ways of picking a quality stock is to look for banks that have been paying dividends for at least 5 to 10 years. Dividends are cash outlays that an unsuccessful bank could never produce. A history of dividend payments is one trait that all the best bank dividend stocks have.

What opportunities do you see in the fintech market?

As the fintech market grows, it’s inevitable that poorly run companies will be open for investments. How do you keep yourself out of potentially disastrous investment situations?