To find the best Canadian growth stocks look for factors such as a strong hold on markets, low debt, and hidden assets

Successful Investors know the value of the best Canadian growth stocks in a sound portfolio and the potential boost they give to long-term returns. After all, by definition, growth stocks are those 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.

Although growth stock picks can be volatile, they can make good long-term investments. They may be well-known stars or quiet gems. Keep in mind, though, that you’ll want to focus on the best Canadian growth stocks—those that have good long-term sales and profit histories and favourable prospects.

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Here are the key characteristics of the best Canadian growth stocks

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

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 the best Canadian growth stocks that also 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 growth 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. 

Look for the best Canadian growth stocks with hidden value to add to your portfolio returns

We also recommend looking for hidden value in individual stocks that attracts far less investor attention than they deserve and so present buyers with potential bargains. They may also attract takeover bids.

Hidden assets can consist of real estate or underused brand names. For example, companies often carry their real-estate assets on the corporate books at their purchase price, even though their value may have multiplied many times over the years. The purchase price goes on a company’s balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet.

In some cases, a company’s real estate can come to exceed the market value of its stock. This type of hidden asset may only become apparent to investors when the company upgrades the use of the real estate.

One of today’s best-hidden assets in aggressive investing is research and development spending by technology stocks. High research and development budgets let tech stocks keep adding profitable new products to their lines and keep improving existing ones.

Looking for hidden value can produce huge profits—and when you lose, you generally don’t lose that much.

Minimize risk in aggressive growth or speculative stocks to protect your portfolio

In the 18th century, pioneering economist Adam Smith said that the public tends to overvalue “speculative ventures.” We think this makes excellent investing advice for present-day investors in speculative stocks.

When a speculative stock is losing money, it has a great deal of freedom to ponder its future. With a little imagination, it can always show that anything’s possible, based on a logical series of events that it says will take place as it advances inevitably toward profitability. Meanwhile, it doesn’t need to worry that its price-to-earnings, or p/e, ratio is too high, since it doesn’t have one—it has no “e.”

When a former money-loser finally starts making money, however, the handcuffs go on. Suddenly this speculative stock has a p/e, probably one that is sky-high. Inevitably the analysts (like us) then start calculating how fast it needs to grow to justify its current stock price, let alone go higher.

Meanwhile, the company’s management has to look at dull, non-uplifting matters like production, costs and deliveries, rather than ramble on about how wonderful things will be in a few years. Then too, once a company becomes profitable, it faces a new risk: the unexpected earnings downturn.

Of course, we do sometimes recommend stocks that have not yet begun making money, mainly in our advisory for more aggressive investing, Power Growth Investor. And as long-time readers know, we have had some standout successes, including stocks taken over at a rich premium.

Use our three-part Successful Investor approach to find the best Canadian growth stocks

 There’s room for growth stock investing in your portfolio, but make sure you follow our TSI Network three-part Successful Investor strategy for your overall portfolio:

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

 What industry do you target for the best Canadian growth stocks in the market?

 How much of your portfolio do you dedicate to investments in growth stocks?