Catching a fast grower before its share price shoots to the heavens is the dream of every investor. Not only does it make you wealthy, it gives you the right to brag in the future as well LOL! But jokes aside, although an ideal way to invest in stocks, it remained a dream to many even till today because no one can see the future and therefore will never know which will be their next darling stock. However, if you are a willing to train yourself, you may actually sniff out clues which will lead you to the next multi-bagger.
Here are 3 things you need to look at to benefit from the next potential fast grower:
1. Market Size
Market size refers to the number of customers the company can potentially sell to. Some companies are stuck within their country whilst some operate globally. It is always preferable to invest in global companies because it means that their potential customer base is significantly larger and that’s how they can grow rapidly! The faster they grow their revenues and profits every year, the faster their share price will climb over time.
Compare local biscuit manufacturer Hup Seng Industries Berhad and global glove manufacturer, Hartalega Holdings Berhad. Both are well run and managed companies but Hup Seng maintained majority of their operations within Malaysia whilst Hartalega sell their gloves globally. If we compare the revenues they generate, we will see a very significant difference:
One is growing at a steady pace whilst the other is growing at a rapid rate and this will translate into their share prices as we shall see below:
Over the past 5 years, Hup Seng hovered between RM 0.80 to RM 1.30. Hartalega on the other hand, saw its share price rising from RM 1.60 to RM 4.57 over the past 5 years. That’s a 285% return or 30% per year return!
2. Hunger for Growth
Although a company’s products or services can potentially serve a global audience, it is pointless if they are not hungry for growth. Some management are simply too complacent or comfortable within their current market that they have no ambition to grow. Therefore, we need to assess the management of the company to see if we can “smell” their hunger for growth and how do we do that? – Reading annual and quarterly reports! When reading these reports, we look for signs of a healthy growing market and initiatives to capture these growth. Lets again take Hartalega as an example:
Take a look at these excerpts from Hartalega’s annual report in 2016:
As we can see, despite headwinds, the industry grew tremendously and Hartalega put a lot of initiative to capture these growth through their NGC plants which has been successful.
If you have read their 2017 annual report, you would have once again, smell the growth brewing in the industry.
And again, in 2018…
And if you want the latest updates, you can read from their 2nd quarter report for Financial Year 2019:
Not only has the industry been experiencing strong and robust growth but Hartalega has time and time again, captured these growth. The likelihood of them capturing these growth again in the future should be high.
3. Right Price
A wise value investor once said, a wonderful company can become a bad investment if one were to overpay for it. No matter how great the prospects are, you need to always be disciplined about the price you pay. In other words, we need to ensure that the company is relatively cheap before investing our money in it. One way to determine if a fast growing company is relatively cheap is to use the PEG Valuation model which you can read here.
Picking a fast growing company should be taken seriously if you want to make rapid gains in the stock market. If you were to follow these steps, your chance to pick up these multi baggers before they fly will be higher than usual. But then again, it is important for the investor to do a full due diligence of the company before considering investing in it. Other factors such as the company’s financial position and competitive advantage should always be considered as well.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.