RC365 shares have produced incredible returns. Over the last two months, the FinTech company’s share price has risen about 400%.
Missed out on these massive gains? Here’s how I’d aim to find the next hot UK growth stock.
Finding the next winner
If my goal was to identify the next big stock market winner, there are a few things I’d look for when researching stocks.
First, I’d look for a company with a small market capitalisation. Generally speaking, the smaller a company’s market-cap, the easier it is for the company to grow meaningfully.
For example, it’s typically much easier for a £50m market-cap company to grow to £100m than it is for a £2trn business to grow to £4trn.
As famous UK small-cap investor Jim Slater once said: “Elephants don’t gallop“.
But this isn’t the only attraction of small-cap companies. Another is that they tend to be less researched. As a result, they are often mispriced. So there is more potential for explosive share price movements.
It’s worth noting here that back in mid-June, around the time RC365’s share price took off, the company had a market-cap of around £30m.
A tight supply of shares
I might also look for companies with a low free float. This means that a limited number of the company’s shares are available for public trading.
When less shares are available to trade, share price movements tend to be amplified. In other words, a bit of good news can send a stock up sharply.
RC365, which has a free float of around 32%, is a great example here.
Strong growth potential
Of course, one thing I’d certainly look for is the potential for significant revenue growth. If a company is expected to generate strong top-line growth in the future, investors often get excited and pile into the stock, pushing its share price up.
To find companies with substantial growth potential, I’d focus on stocks in high-growth industries such as artificial intelligence (AI), cloud computing, FinTech, and renewable energy.
Because these industries are growing rapidly, many companies within them are often growing at a fast pace. And stocks in these industries often have exciting growth stories (eg large total addressable markets), which draw investors in.
Buying at the right price
Finally, I’d look for a reasonably low valuation, so there’s scope for a price re-rating.
Now often, smaller growth companies don’t have earnings. So there’s no price-to-earnings (P/E) ratio. But I could focus on the price-to-sales ratio instead. This can be useful for valuing high-growth companies with no earnings.
I’d seek out companies with ratios under 10 or so, in order to ensure I wasn’t overpaying for them.
Hedging my bets
Now, it’s worth stressing that smaller companies tend to be risky investments. For every RC365, there’s a stock that fails spectacularly.
Therefore, I would hedge my bets by investing in a number of different growth companies. This would give me a better chance of picking a winner.
