Stock market

How do I find quality growth stocks?

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Owning a diversified portfolio is a priority for me. Even so, I can’t deny that I have a preference for quality growth stocks.

Today, I will explain how I invest in them.

Diamonds in the rough

What do I mean by ‘quality’? Well, it’s always going to be subjective. Ask 10 idiots and you’ll probably get 10 idiotic answers. Personally, I look for:

  • Competitive advantage (such as brands)
  • Low/no debt.
  • Big margin
  • Above average return on capital
  • A history of regular and growing profits

An example of a stock that I think fits this criteria. FTSE 250– Listed Games Workshop (LSE: GAW).

The firm is a leader in a niche market and benefits from a fanatical following with deep pockets. It has net cash on its balance sheet, an operating margin of around 35%, and a return on capital employed of around 60%. It also regularly increases its profits.

That doesn’t mean its share price can’t fall. In fact, owners will have seen the value of their shares roughly halve between September 2021 and September 2022.

For me, it just comes with the territory of investing. But these fluctuations will not suit everyone.

An alternative strategy

There is an easy way to invest in quality stocks, that is, let someone else do it for me.

One name that comes to mind is manager Terry Smith. As of the end of March 2024, Smith has returned 15.8 percent annually since inception Fundsmith Equity In 2010 Compare that to its benchmark (the MSCI World Index) of 12% and you can see why it’s so popular. This may not seem like a big difference, but it is when compounded over many years.

That said, even Smith has underperformed in recent years, thanks to tech juggernauts like Nvidia. And, naturally, it has taken an (extraordinary) fee along the way.

Speaking of price…

Deactivating.

A cheaper option is to use an exchange-traded fund (ETF). Here is an example. iShares Edge MSCI World Quality element. As it sounds, this is a passive fund. This means that the portfolio operates according to predetermined rules rather than the whims of a human manager.

Not that it should be seen as a limitation. Anyone buying at the peak of the panic in March 2020 will now double their money. In comparison, FTSE 100 The index has returned 54% (excluding dividends).

Another advantage is that my money is spread over about 300 companies. Smith’s fund has just 28 holdings, making it a much riskier proposition. Then again, holders do better when the picks are good.

No guarantee.

Personally, I use all three methods mentioned above. I have invested with a select band of professional money managers (Smith included) and have another quality bent in passive funds. And because I find the challenge of picking stocks intellectually stimulating (not to mention occasionally profitable), I own shares of a few companies that do none of the above.

Of course, buying quality growth stocks won’t make me rich overnight. No strategy will do that. And anything that does seems like gambling to me.

But owning the best the market has to offer as long as possible feels like something I can stick with. And isn’t that the point?


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