Spotting the biggest stock growth potential isn’t easy, but there are a number of key factors to look for—plus ways to cut your risk

Successful Investors know the value of high-performing growth stocks and the potential boost they give to long-term returns. After all, by definition, the biggest stock growth can come from growth stocks that have risen at a higher-than-average rate within their industries, or within the market as a whole. That can be over a period of years, or even decades.

Meanwhile, many investors overlook a number of important factors that can considerably lower their risk in a successful growth investing plan.

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Use key fundamentals to assess the biggest stock growth potential of your portfolio

Fundamentals are essentially a company’s financial numbers. These include its balance sheet, statement of cash flows, and income statement, as well as other qualitative and quantitative measurements that can highlight the health and growth prospects of a company.

Using a stock’s fundamentals is also known as “bottom-up” analysis. Using the bottom-up approach, you focus on understanding what’s going on, rather than trying to predict what happens next.

You could call this descriptive finance. You delve into earnings, dividends, sales, balance sheet structure, competitive advantages and so on. From there, it quickly becomes obvious that there’s an awful lot you don’t know about the risks in the investments you are considering. So, you try to design a portfolio in which the risks offset each other.

Over periods of five years and beyond, top investment honours usually go to members of the bottom-up crowd. That’s partly because bottom-uppers tend to make fewer big mistakes. This lets their gains accumulate. This also leads to longer holding periods, which provide greater tax deferral and lower brokerage costs.

Small-cap stocks can give you some of your biggest stock growth

 The size of a company is based on its market capitalization, or net worth. Market capitalization is the total value of all the company’s outstanding shares. It is calculated by multiplying the number of shares outstanding by the market price of a single share. There is no universal definition for a “small cap” company compared to a micro-, mid- or large-cap company.

Many analysts, however, consider any company with a market capitalization of between $250 million and $1.2 billion to be a small-cap firm.

Companies in this category are often still in their initial phase of growth. Their stocks have the potential to increase significantly. Small-cap stocks have historically posted higher returns than blue-chip stocks, but they are generally more volatile. They also carry a higher degree of risk. But small-cap stocks have frequently outperformed large-cap stocks during periods of recovery from a recession.

Get the biggest stock growth in your portfolio—but at the same time cut your risk

The tips below for lowering your growth investing risk have long been part of the advice we give you in our investment services and newsletters, including our flagship publication, The Successful Investor.

• Don’t overindulge in aggressive investments.
• Be skeptical of companies that mainly grow through acquisitions.
• Keep stock market trends in perspective, and realize that while the market often anticipates trends, no trend lasts forever.
• Balance your cyclical risk by investing in growth stocks that have freedom from business cycles.
• Keep an eye on a growth stock’s debt.
• Look for growth stocks that have ownership of strong brand names and an impeccable reputation.
• Industry prominence, if not dominance, should be a factor in choosing growth stocks to invest in.
• Dependable investments have the ability to serve all shareholders.
• Hidden value in unseen assets can lead to greater long-term returns.
• Top growth stocks have brand loyalty behind them.
• The best growth stocks should have the ability to profit from secular trends.

Avoid selling stocks on the rise too early or you could miss out on the biggest stock growth

It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.

You can always find a reason to sell. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless. This is a good thing. After all, you can only buy a stock if somebody who owns it wants to sell.

Before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

Use our three-part Successful Investor approach to discover the best shares for the biggest stock growth

These three safeguards will tend to limit your losses at the worst of times. But over long periods, they also let you profit nearly automatically.

• Invest mainly in well-established, mostly dividend-paying companies.
• Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities).
• Avoid or downplay stocks in the broker/media limelight.

What sectors do you target for the biggest stock growth?

How do you avoid selling your fastest growing stocks too soon?