If I had time machine, I would go back in time and buy Apple stocks right before they announced the iPod and iPhone (among other things of course). That would have been one killer investment. Same is true with Starbucks, someone who identified the company in its early day and invested in their stock made a lot of money. So how can one identify such companies that may experience exponential growth?
In this article I will go over some of the things to look for when researching a company in an industry that can help you identify a winner that has the potential to grow significantly faster than other companies in their industry.
As we evolve as a society and with technology innovations, new market segments are created or new ways to address existing markets are created. This creates immense opportunities to invest.
Often looking for things that are valuable but are overlook by traditional investors or not valued correctly by investors due to historical reasons or structural reasons. This is good way to find companies that may give you higher return.
Look beyond the technology sector
Commonly people only consider technology companies to have explosive growth in the future. And while technology companies may have a good chance to scale fast (as demonstrated by Google, Facebook and Amazon) there are several other industries that can produce companies that can grow fast (especially leveraging on the new technology platforms). Starbucks at core is not a technology company, sure they use many process refinements which use advanced understanding of technologies used, but they would not be categorized as a technology company stock.
Every now and then there is an innovation that changes the playing filed. While this may be disruptive for many existing businesses, it may also be a very good opportunity to invest in companies that are in a position to take advantage of such a trend. A hypothetical case would be traditional electricity grid vs. solar energy. While solar power is not the cheapest and needs an upfront investment. There is a good chance that a technology innovation along with some government programs can work to make it one of the cheapest power sources. A company that sells solar power or equipment that generates solar power can experience a lot of growth in a short time due to such a change.
Tap on new trends
The buzz word in any industry are a good way to find new trends. While some of these new trends may fizzle, some are here to stay. For example, organic and local are trends that are making a serious impact on our food industry. Many companies are adapting to this trend and many new companies are in a strong position to make use of this trend to establish a new brand taking and capture a huge market share by taking it away from existing food companies.
Investors typically value companies based on a set of historical multiple and find it very difficult to evaluate companies that do not fit squarely in one of their valuation models. If a mid-size company operates in the clothing business, it is likely to have multiple similar to its competitors even it has been growth significantly faster than it other competitors or has some other advantages like brand following, cost or geographic advantage, etc.
Incorporate these ideas in to your research process. Look at the product offering of the company and see if they have a futuristic product that can really impact the way we go about doing certain things. Look at their financial to see if the investors are overlooking certain strengths of the company over their competitors. See if the company is addressing a growing market with few or no established players. See if the company is going with the trend or falling behind.
What is your criteria for picking a winning stock?