Transforming £1,000 into £5,000 using UK growth shares is quite a task. After all, that’s a 400% rise on my initial investment.
Expecting these sorts of returns over a couple of months is, in my opinion, too optimistic and often leads investors pursuing such short-term gains down exceptionally risky avenues.
Instead, I aim to generate this wealth over the next five years. The question is, how to find such opportunities today? Let’s explore.
Identifying competitive advantages
What can often be forgotten is that when an investor buys a stock, they’ve just purchased a piece of a business. That’s why when a company does well, in most cases, so does its stock price.
So predicting which UK growth shares will become monsters in the future is the wrong question, in my opinion. Instead, I ask which businesses are set to thrive and prosper in the coming years.
There are a vast number of industries with equally vast opportunities. For example, the automotive sector is currently undergoing a massive shift toward electric vehicles. Meanwhile, technology companies are preparing for the incoming metaverse. The list goes on, and plenty more opportunities like these will appear in the future as well.
There are countless businesses operating in each of these spaces. Most of them either won’t make it or will not deliver desirable triple-digit returns for my portfolio. So how do I know which to buy and which to avoid?
Throughout my ongoing investing journey, I’ve learned that the best investments are those in businesses with key advantages over their competitors. That’s why when looking at any stock, I ask: “What makes this business special?”
Does it have a strong brand that delivers pricing power? Is its technology superior to that of its rivals? Are there high barriers to entry for newcomers to its industry? If the answer is yes, then I could be looking at a long-term winner for my portfolio.
An example of a thriving UK growth share
Keywords Studios (LSE:KWS) is a prime example of a company leveraging its scale and growing reputation to dominate its industry.
The firm provides support services to the video game development sector. And its list of competitors is far from short. But by offering services that cover the entire scope of the development process, rather than specific parts, it’s become a one-stop solution for studios worldwide, including Ubisoft, Electronic Arts, and Take-Two Interactive, among numerous others.
This advantage has enabled its revenue to climb from €96.6m to a forecast €500m over the last five years. Unsurprisingly, the share price has followed suit, delivering a 396% return for investors over the period. That means a £1,000 investment in January 2017 would now be worth £4,960 today – just £40 shy of my £5,000 target.
Of course, this isn’t a risk-free enterprise. A core part of Keyword’s success stems from its acquisitive growth strategy to expand its talent pool. Acquisitions can go south quickly, and if a series of poor decisions are made by management, it can lead to a compromised balance sheet.
Despite this risk, I believe shares of this UK growth stock look primed to continue surging for many years to come. That’s why it’s already in my portfolio.
