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If you’ve heard the term “growth stocks” before, there’s a good chance that it was referring to large technology companies such as Apple, Microsoft, Amazon, Tesla or Alphabet (formerly Google).
These are the five most heavily weighted components of the Standard & Poor’s 500 index, so they have an outsized influence on the overall movement of the stock market.
However, not all growth stocks are technology stocks. Growth stocks can be in the health care sector, the financial sector or any other sector. What defines them is, well, growth. Here's a deeper look at what that actually means.
What is a growth stock?
Growth stocks are stocks of companies whose revenue is growing faster than average. Growth stocks typically don’t pay dividends, reinvesting profits into their growth instead. Investors buy growth stocks in the hope that their share prices will rise quickly.
Growth stocks are often contrasted with income stocks, which investors buy for their consistent dividend payments, and value stocks, which investors buy in the hope that their prices will rebound from a recent setback.
» Learn more about the differences between growth and value investing.
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Best-performing growth stocks
Below is a list of the top 7 U.S.-listed growth stocks, ordered by one-year performance. To compile this list, we take into account the growth rates of revenue and earnings over the past year and prior year, as well as price-to-earnings ratios and dividend yield over the past year.
Performance (1 Year)
Super Micro Computer Inc
Vertiv Holdings Co
Abercrombie & Fitch Co.
Modine Manufacturing Co.
Oceaneering International, Inc.
Source: Finviz. Stock data is current as of October 2, 2023, and is intended solely for informational purposes.
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How to find growth stocks
You can identify growth stocks using a stock screening program like Finviz — that's how we compiled the list above.
To find growth stocks with a screener, filter for high EPS growth and revenue growth (sometimes called sales growth). You can also screen for high PE ratios and non-dividend-paying stocks — as we did above — to further refine your search to growth stocks that have share price momentum and are aggressively reinvesting money in their own growth.
Should you buy growth stocks?
That depends on you and your investing goals. The stocks above may be beating the market right now, but that doesn’t mean that you should go all-in on them. Past performance does not predict future performance, and picking individual stocks can be a risky business.
Many investors instead buy index mutual funds and exchange-traded funds, which bundle hundreds or thousands of stocks into a single investment. Index funds, by definition, don’t beat the market — they move with the market.
The S&P 500 index, which contains roughly 500 of the largest publicly traded companies in the U.S., has returned an average of about 10% per year since 1926. That makes it a powerful tool for compounding wealth over the long term.
However, it’s worth emphasizing that 10% is the average annual return of the index. In some years, the index does much better than that, but in other years, it does much worse.
During downturns, skilled stock pickers can theoretically outperform the market indexes by investing some of their money in individual companies that buck the negative trend, like the ones shown above. But be careful: Studies have shown that individual investors usually underperform the market indexes. .
Other investors harness the power of index funds and individual stocks with the “90/10 rule.” They invest no more than 10% of their portfolios in individual stocks and keep the rest in low-cost index funds.
The author owned Alphabet stock at the time of publication.