Finding stocks with growth potential that will fulfill their promise is not easy. But there are a range of tried and true factors to watch out for. Here they are:

Top-quality stocks tend to lose less of their value in the kind of severe market setback we’re experiencing today. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.

To build a portfolio of those stocks–and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight

Meanwhile, when investing in stocks with growth potential, there are a number of ways to separate the good ones from the bad ones. Here’s a look at some key considerations:

Use these tips to find the best stocks with growth potential to add to your holdings

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.
• 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.
• Be skeptical of companies that mainly grow through acquisitions.
• 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.

For a rising portfolio Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor. Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Avoid stocks with growth potential but that have added risks due to their growth-by-acquisition strategy

Investors often underestimate the hidden risks of a company that grows by acquisition.

These acquisitions generally come on the market when it’s a good time to sell. That may not be, and often isn’t, a good time to buy. Insiders and managers at the selling company know a lot more than the buyers about the company itself, and its business strengths and weaknesses.

Some takeovers work out well for the buyers, of course. This doesn’t diminish the inherent risk. More important, risk multiplies as takeovers become a habit.

Takeovers are more likely to succeed when the buyer is already a successful company and is under no pressure to buy anything. That way, the buyer can take its time and wait for a truly attractive, low-risk opportunity to come along.

Also, if a takeover starts to falter, well-managed companies are likely to cut their losses while there is still some value to salvage.

A growth by acquisition strategy isn’t foolproof, even the best managed companies stumble, and fail. The best companies cut the risk by only making takeovers that help expand their core business. They are willing to get out, even at a loss, when they see an exit as the smart thing to do.

All in all, a growth stock’s acquisitions can bring “time-bomb” risk. Companies sometimes grow quickly by buying other companies. But sellers may simply want out of a losing situation. Growth by acquisition can work out, but it can also mean a waste of capital and time.

Avoid confusing growth stocks with momentum stocks to make better investments for your portfolio

It’s very easy to confuse growth stocks with momentum stocks. Like growth stocks, momentum stocks often move up faster than the market averages. But momentum stocks attract a different kind of investor. Growth-stock investors are in for the long haul, while momentum investors aim to profit from short-term trades.

Momentum investors like to invest in companies whose earnings and stock prices are rising quickly. They are largely unconcerned with value considerations such as high p/e ratios or low dividend yields. They don’t care if a stock trades at 50 or even 100 times earnings. They assume that the company’s earnings and sales will continue to rise say, 15% to 17% a year, on average, as they have in the past five years, and that the stock price will do the same.

Some analysts believe that controversial stocks with growth potential often have a greater upside. What’s your opinion?

Have you bought into a momentum stock, mistaking it for a growth stock? How did the stock work for you?