Growth investing has been the road to riches for more than a decade. With high-powered darlings like Facebook, Inc., Shopify Inc, and Netflix, Inc., the tech sector has led the way, delivering multi-bagger returns again and again.
These days, investors are also throwing money at high-growth cannabis stocks like Green Organic Dutchman Holdings Ltd and Cronos Group Inc.
Tech and cannabis aren’t the only games in town, however. There are plenty of growth stocks across every industry, including retail, energy, transportation, and more.
Opportunities abound, but don’t forget about the associated risks. When growth stocks falter, they can drop by 30% to 60% in a matter of weeks.
The upside is often worth the risk, but there are plenty of ways to boost your odds of success. Here are three beginner tips to make sure your growth investing days are as rewarding as possible.
Don’t pay too much
The number one thing that dictates how much you earn is how much you pay. It doesn’t matter how quickly a company is growing—it’s possible (sometimes easy) to overpay.
If a company grows revenues by 50% this year, but you paid a price that implied 60% growth, you could actually lose money on your investment. Always remember: the value of every investment is a function of how much you pay for it.
Canada Goose Holdings Inc. (TSX:GOOS)(NYSE:GOOS) is a perfect example. After IPO’ing in 2017, shares tripled within 24 months. Revenue and profit growth continually outpaced expectations, pushing its valuation close to 100 times earnings.
After peaking at around $90 per share in October of 2018, the stock sank by more than 50% as growth started to slow.
To be sure, management still expects sales and profits to grow between 20% and 30% annually, but the market had expected the rate to be a bit higher. The valuation came down tremendously