The Ultimate Guide to ASX Growth Stocks

You only need one or two ASX stocks in your share portfolio to double, triple or more to get the stellar results you want. We give you examples and show you what to look for so you can get started.
 

You’re looking for ASX Growth Stocks so you can bank some knockout returns. Investing in a few growth stocks is a smart way to set up your ASX share portfolio for growth.

What is a growth stock?

A growth stock is a company that is currently priced cheaply, has strong management, a great product or service, has cash (not debt laden) and has the potential to really grow fast. Growth stocks often operate in a niche industries such as Sirtex Medical (SRX) or Afterpay (APT). Our analysts are always looking for the catalyst that will transform a business and when it does, it will transform the wealth of its share investors too.

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Why invest in growth stocks?

You should invest in growth stocks to transform your share market returns and grow your wealth quickly. There are lots of examples of growth stocks that show you how this is done. A recent example is Afterpay (APT). We first tipped this growth stock at $2.51 when no-one had heard of it. Our analysts spotted a growth company that had the potential to change the way everyone paid for their online shopping.

APT was a classic growth stock, with huge upside if its technology became entrenched. Fast forward 3 years and it now trades close to $100. Not only has APT transformed the way we all shop, but if you had invested $1,000 when we recommended it at $2.51, your investment would now be worth $39,000! It’s impressive and it shows you why you need to invest in a couple of growth stocks so that you are putting yourself in the position to really transform your wealth.
 
Northern Star (NST) is another great example of a growth stock. We first tipped the miner at just 83c. It now trades at $12.86. A $1,000 investment at 83c is now worth $15,400. We first covered NST when it was a small miner, now it has merged with Saracen (SAR) and is a big player on the ASX. Where else can a $1,000 investment become $15,000 or $39,000!

Growth stocks in a diversified portfolio

All ASX investors looking to outperform the market need to know how to set up a portfolio of diversified growth stocks. Growth stocks play an important role in a portfolio of shares as they can help diversify. ASX investors don’t buy just one company, but take a portfolio approach and buy companies from a broad range of industries, and sectors. 
  
Parking your money in the bank won’t even return 1% and doesn’t keep up with inflation. The ASX returns on average 10-13% a year. To beat that performance you need to have a couple of growth stocks in your portfolio to get real growth.

What are the catalysts for share price growth?

A catalyst for growth comes in many shapes and sizes and in every small stock it is different.

With the growth stock APT, it was their disruptive technology that changed the way transactions are made. With NST we were able to believe in management’s vision. They started from nothing, with one producing mine and the CEO said they were going to develop and grow. There are lots of mines and miners who come to nothing, so why was Northern Star different? Bill Beament had a strong vision and was able to deliver on it. He consolidated and was an innovative mining and acquired other mines cheaply. The catalyst was management’s vision and ability to deliver. When choosing growth stocks, investors need to believe the vision will pay off.

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Why Small Caps are great growth stocks

Small Caps are great growth stocks as with Small Caps, management and board are closer to the front line. They are critical players. With bigger companies you are turning around a ship, but with little companies, you can change things much more quickly. Paradoxically, it’s much riskier for a big BHP size company to change strategy, there are bigger risks associated with change. 
 
Before you back management with your money, you must tick off the balance sheet to check they are not going broke, and that the short-term sales pipeline is strong. After that it’s about believing in management’s vision. It matters more for a growth investor or analyst to be in touch with a company at the front line, than for big caps.
 
But the returns are worth the investment and portfolio’s are transformed and wealth made from a handful of well picked growth stocks.

How to find the best growth stock?

To find the best growth stocks you should recognise the characteristics of a company that is a true growth stock, however, this takes skill and experience. 
 
It is important to understand key investment terms to analyse a companies fundamentals. In our experience the best growth stocks have a market cap of between $50-$600million market cap. 
 
Growth stocks with a market cap of under $50million are high risk, with low liquidity (link liquidity to key investment terms) which means it can be really hard to buy any stock, but if you can, it can be hard to sell. These are tiny micro-caps with a hit and miss history. Investors can buy growth stocks with a higher success rate and reduce unnecessary risk by buying stocks with a market cap over $50m.
 
Stocks over $600 million are bigger, more established businesses that are operating successfully but that will find it much more difficult to double or triple in size from here. Remember growth companies are small companies because it is much easier to grow 5x or 10x if you are small.
 
At Under the Radar Report we primarily focus on buying stocks in this $50-$600m market cap sweet spot. We recommend them while they are cheap, to maximise returns. 

6 steps to finding Growth Stocks on the ASX

This 6 step process is part of our investment philosophy.

  1. Growth sectors: Is there fast and growing demand for the product or service? Or has it the potential to transform how business is done?

  2. Competitive Advantage: Do they have a niche? Are they established and growing fast?

  3. Management is key in growth stocks. Are they true experts in their field?

  4. Return on Investment: We look for a high return on capital 

  5. Understand the cashflow and reconcilliation to profit (yes, we number crunch).

  6. Low valuation to potential

Best ways to spot a top growth stocks

It’s important to go back to do proper fundamental analysis when spotting top growth stocks to buy. Our analyst team follow 7 strict investment criteria when choosing the right Small Caps, then our team dive deep into the analysis of each company before we recommend it. We continue to watch each stock, evaluating price moves, company results and announcements until it’s time to sell.

  1. Look for growth sectors

  2. Cash is king

  3. Current share price and chart

  4. In Small Caps the experience of management is critical

  5. Dig for the risks. Bull points should be obvious and make sure you know all the bear points so you are investing with your eyes open.

  6. Valuation methodologies. Get back to basics, read the financial reports and all results and number crunch.

  7. When choosing a Small Cap, you need to know where the catalyst for growth is? What needs to happen for this stock’s valuation to grow?

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High growth stocks for smart investors

Growth stocks are often disruptive stocks, or small companies that use technology to find a smarter, cheaper way to do business. Overtime it becomes obvious, but early on these companies are revolutionaries.

Three growth stocks you need to know about in 2020

Growth stocks are exciting innovators, and Richard Hemming has selected Three Best Growth Stocks for 2020. To get the latest research on these growth stocks and our latest Buy, Sell or Hold recommendations, join for free
 
The TPG spin-off Tuas (TUA) is a newly established and disruptive entrant to Singapore’s mobile telco market. The stock offers an opportunity to invest along side the most successful operators in the space. 
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Alliance Aviation (AQZ) isn’t widely known to be a disrupter because it’s in the aviation industry. But make no mistake, its success is due to its foresight in buying low maintenance planes on the cheap and utilising a superior business model based on contracts that avoid day to day competition for seats that ties up the bigger airlines. 
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Volpara Health Technology (VHT) is a med-tech disruptor, operating a software-as-a service business model that uses AI algorithms to improve the early detection of breast cancer by analysing breast images (mammograms) and associated patient data.
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