Growth stocks provide a fantastic opportunity to boost wealth but they come with added risk and the potential for more volatility.
Here’s how I look for the best picks for my holdings. Plus, I’ll break down one opportunity I like in the form of FTSE AIM incumbent dotDigital (LSE: DOTD).
My approach
One of the biggest aspects I consider for any growth stock is the industry it operates in. There are often high-growth industries that could be set to soar for a number of reasons. An example of a couple are lithium or artificial intelligence (AI) tech stocks. With higher potential for growth than other sectors, there’s a good likelihood the right stock can soar.
Should you invest £1,000 in Tesco right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco made the list?
Next, I take a closer look at where my potential pick sits in its industry. Is it a leader with an established customer base, track record, and data for me to review to make a shrewd investment decision? Alternatively, it could be a start up with a unique selling point or advantage such as cutting edge technology.
Finally, valuation is king! Buying shares at the right level can dictate whether or not I’m going to benefit from any growth. I can look to compound my returns and capital growth towards other growth stocks or even buy more of the same stock. It’s worth remembering some growth stocks already have growth priced in. Reviewing a price-to-earnings ratio as well as a price-to-earnings growth ratio is how I value shares.
Tech stock
dotDigital is a software-as-a-service (SaaS) company. This means it provides a bespoke software to its clients to help fulfil a purpose. In dotDigital’s case, it helps digital marketing professionals and e-commerce businesses.
As you may have noticed, online shopping and digital marketing have exploded in recent years. This was sped up by the pandemic a few years ago. It seems, while brick-and-mortar retailers are struggling, online only firms are thriving. I know, personally, I’m inclined to order certain things from the comfort of my home with a click of a few buttons rather than waste time, money, and fuel to travel out to shop.
With digital marketing spend and e-commerce only set to rise, according to Statista, there’s plenty of room for growth for dotDigital.
The shares look decent value for money on a price-to-earnings ratio of 21. This is a tad higher than I’d like but the company has been on a good run recently, which I see continuing. In addition to this, a dividend yield of 1% would help me boost my returns and I’d reinvest these into other growth options. As the firm grows, I’d expect to see this level of return grow too. However, it’s worth remembering dividends are never guaranteed.
Risks and final thoughts
Competition in the digital marketing and e-commerce sector is one bearish aspect I’ll keep an eye on. Furthermore, continued macroeconomic volatility could hinder businesses spending on e-commerce and digital marketing channels. Both of these aspects could hurt dotDigital’s future growth, performance, and any returns too.
Overall, I think dotDigital is a great option for me as it is operating in a sector primed for further growth. I’d be willing to snap up some shares the next time I can.
