3 Reasons Why These Growth Stocks Will Soar
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Will Rogers was famous for saying, “only buy stocks that go up. If they don’t go up, don’t buy them.” That sounds good, but in practice it’s much harder to actually accomplish. However, by answering these three simple questions you’ll be able to invest better and find growth stocks that truly soar.
What’s Their Addressable Market?
The technology might be breakthrough or the concept might be pretty cool, but if there is no addressable market to serve then the odds of them pulling in any profits is pretty slim. One look at Amazon’s (NASDAQ: AMZN) addressable market and you’ll see that they’ve only begun their run. They compete in a four trillion dollar market yet only five percent of those retail sales are done online. Amazon just has a fraction of those sales meaning they can grow for decades if they keep disrupting.
Another company with a massive addressable market is Arcos Dorados (NYSE: ARCO). As the exclusive franchisor of McDonald’s (NYSE: MCD) in Latin America their market is twice the size of Mickey D’s US business. They have less than 2,000 restaurants to serve their market while there are over 14,000 golden arches stateside. That's a lot Big Mac Shacks to build.
Are They Differentiated?
More specifically, do they have a better product than what’s currently on the market or have they developed a disruptive technology? Natural gas engine innovator Westport Innovations (NASDAQ: WPRT) has developed the technology that is replacing dirty diesel with cheaper, cleaner natural gas. That’s both a better product as it saves money and a disruptive technology as it is replacing a decades old standard technology.
Another company disrupting a decades old business is Facebook (NASDAQ: FB) which has begun to disrupt how companies market to their customers. Now branding isn’t about attaching the brand to a celebrity but it’s more valuable if your friend likes the brand first. Their social network will continue to disrupt how we transact by making it more social and relational than ever before.
Do They Have a Sustainable Competitive Advantage?
Finally, and most importantly is to consider if the company’s current competitive advantage can endure. Arco’s for example has a 20 year exclusive agreement with McDonald’s to franchise and grant franchises in Latin America which includes a 10 year renewal option. That exclusive contract will give them a very large head start on any would be competitor should one be granted a license.
Westport’s advantage is in their leading intellectual property with more than 400 patents either granted or pending. That’s nearly three times as many as their nearest competitor. Their technology and IP advantage is encouraging other companies to partner with them instead of compete against them.
For a company like Facebook, their addressable market is their competitive advantage. Nearly a billion people use their platform each month. These users have given Facebook more data and usable connections to create a multibillion dollar ad platform. They have limitless possibilities in monetizing their platform because their fans aren’t going anywhere else.
Finally, with the “earth’s largest selection” and cost advantage over their brick and mortar peers, Amazon is able to continue to grow and take market share. They’ve also developed disruptive technology that’s put many a brick and mortar peer out of business. They've disrupted how we read books and they’ve done so because they see their profit model differently than their competitors. CEO Jeff Bezos recently said, “We want to make money when people use our devices, not when they buy our devices.” They’ve taken that advantage to build a very loyal customer base.
I believe that these four growth companies will soar for decades to come. That’s why I’ve added each one to my virtual “No Drip, No Mess” portfolio and have invested in most of them personally. Do you have a favorite growth stock that I could consider for my next buy? Post your company and how answers the three simple questions in the comment box below.
latimerburned owns shares of Westport Innovations and Arcos Dorados and has options positions on McDonalds and Facebook. The Motley Fool owns shares of Amazon.com, Arcos Dorados, Facebook, McDonald's, and Westport Innovations and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Facebook, McDonald's, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.