03 May Growth Stock Dreams Are Made of These
Everyone has their own preferred way of investing.
For All Stars, our clear preference is for growth.
We all have our own reasons why we invest the way we do.
Investors looking for value plays find comfort in paying a lower price. Income investors, on the other hand, would love nothing more than the sound of dividends hitting their bank account every quarter.
And then there is growth, our go-to investment style for All Stars.
Our natural instinct as an investor is to look for companies that can grow for five years or more, preferably longer.
Let me tell you why.
When we ran the Stock Advisor Singapore service at the Motley Fool, growth was the style that bought us our first stock that doubled.
Yes, this stock went up over 100% in a short period of time..
Even better, it was neither hidden or small.
I am talking about Amazon (NASDAQ: AMZN), of course, a stock that we picked in late February 2017. By June 2018, the stock doubled in returns.
Let me explain how we spotted the opportunity.
The Mind of a Growth Investor
There are two useful ways to think about the future growth prospects of a company, which I call magnitude and probability.
Magnitude refers to the size of the market that the company is in.
Some companies have larger markets compared to others.
For instance, local telco StarHub (SGX: CC3) offers mobile services in the Singapore market alone. But the Lion City’s mobile penetration rate is already touching 150%, leaving little room for growth.
Amazon, on the other hand, is a behemoth compared to StarHub.
The online retailer generated US$280 billion in sales in 2019, compared to StarHub’s S$2.3 billion.
At first glance, it is hard to imagine that Amazon has much growth left.
But as growth investors, we know that size is always relative.
We noted that the US ecommerce sales accounted for less than 10% of the entire US retail pie in 2016. That means, there is 90% of retail still happening in brick and mortar stores.
When we put Amazon in that context, the potential growth runway remained significant.
But our observations did not end there.
A growth runway is only good to have if the company can take its fair share of the market.
And that’s where the second parameter, probability, comes in.
In our mind, we had to assess the odds of Amazon taking more share from offline to online and therefore, provide us with growth in the future.
Notably, Amazon had a structural advantage from the hundreds of warehouses that it owns. The online retailer’s advantage here would be hard to replicate.
Furthermore, demand is supported by the popularity of Amazon’s Prime subscription service which crossed the 100 million subscriber mark in April 2018.
With benefits such as two-day shipping, the company’s warehouses were kept busy.
When you take a step back and put magnitude and probability together, you would see that Amazon had both the track record and runway to make the most of the market opportunity ahead of it.
We will be launching All Stars in a few days’ time. Come and experience this exciting and wildly profitable journey of investing with us as we look for, and bag the next shooting stars…