Tips: Invest Or Avoid?

The stock market is experiencing a bullish momentum, with the S&P 500 logging back-to-back quarters of 10% gains for the first time since 1950. While there are concerns about inflation, interest rates, and the upcoming US presidential election, the market has been resilient, and investors are optimistic about the positive momentum continuing.

When deciding whether to invest, it's important to consider your financial goals, risk tolerance, and time horizon. It's also crucial to research the company's financial health, industry trends, management track record, competitive advantage, valuation, dividend yield, and risks.

- Spotify Technology S.A. (SPOT)

- The Progressive Corporation (PGR)

- Alphabet, Inc. (GOOG, GOOGL)

- Intuitive Surgical, Inc. (ISRG)

- Tapestry, Inc. (TPR)

- TopBuild Corp. (BLD)

- Citigroup

- The Kraft Heinz Company (KHC)

- Fidelity National Information Services, Inc. (FIS)

- Meta Platforms (META)

- CVS Health Corp. (CVS)

- Estee Lauder Cos. Inc. (EL)

- Global Payments Inc. (GPN)

- Baxter International Inc. (BAX)

- Clorox Co. (CLX)

- Cadence Design Systems (CDNS)

- Thermo Fisher Scientific

- Discover Financial Services (DFS)

- Diamondback Energy (FANG)

- Delta Air Lines (DAL)

- Pfizer (PFE)

- Vulcan Materials (VMC)

How to find growth stocks

Identify Market Trends and Competitive Advantages

Firstly, identify powerful long-term market trends and the companies best positioned to profit from them. For example, the rise of e-commerce, digital advertising, digital payments, and electric vehicles. Then, narrow down your list of companies to those with strong competitive advantages, such as intellectual property, size and scale, or loyal customers.

Focus on Innovation and Experienced Leaders

Growth companies often innovate to create new solutions that align with long-term trends. Look for companies with an innovation focus and experienced leaders who can turn ideas into results. For example, Tesla capitalized on the rising demand for electric cars by building models that were faster and more fun to drive than existing options.

Large Addressable Market

Growth companies target large, global markets. For example, Tesla sells cars worldwide, while Amazon retails and wholesales hundreds of millions of products across multiple country-based marketplaces. Look for companies with large addressable markets and long runways for growth.

Use Stock Screeners

You can use a free stock screener, such as Finviz, to identify growth stocks. Look for high earnings-per-share (EPS) growth, revenue growth, high price-earnings (PE) ratios, and non-dividend-paying stocks.

Do Your Research

Remember to do your holistic research. What are the larger market trends? Which industries are expected to experience significant growth in the coming months or years? For example, the AI industry has seen massive growth in recent years, and many AI stocks have increased in value.

The importance of cash flow

Cash flow is the inflow and outflow of money from a business. It is crucial for the daily operations of a business, including paying employees and operating costs. Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, and provide a buffer for future financial challenges.

• Make Better Plans and Decisions: With an accurate cash flow statement, you can make informed decisions and plans. It helps you understand the exact amount of funds available, ensuring that your plans are supported by accurate financial data.
• Understand Spending: Effective cash flow management provides a clear picture of where your money is being spent. This understanding is crucial for identifying areas where costs can be cut and ensuring that your spending aligns with your business goals.
• Protect Business Relationships: Maintaining positive cash flow helps protect your business relationships with suppliers. It ensures that you have the funds to pay your suppliers on time, maintaining a good reputation and fostering strong relationships.
• Expand Strategically: Business growth requires a significant amount of cash for stock purchases, new hires, and other expenses. By managing your cash flow effectively, you can identify the right time to expand, ensuring that you have the necessary funds to support your growth.

A healthy cash flow is vital for the success and sustainability of a business. It enables better decision-making, financial planning, and relationship management. By understanding your cash flow, you can make strategic choices that support your business goals and help you navigate future financial challenges.

Should You Invest in TIPS?

Treasury Inflation-Protected Securities (TIPS) are backed by the US government and designed to protect against inflation. As inflation concerns grow, investors often consider TIPS as a way to hedge against rising prices. TIPS offer regular interest payments based on the par value until the security matures, at which point you receive your principal back.

However, TIPS have duration risk, meaning they are sensitive to changes in interest rates. Additionally, TIPS may be more suitable for short-term goals, as their yields are typically below non-inflation-protected bonds.

While TIPS can provide protection against inflation, it is important to consider the overall investment landscape and your specific financial goals before making any investment decisions.

The risks of investing in stocks

Investing in stocks can be a risky business. Here are some of the key risks to be aware of:

Market Risk

Stock prices can be volatile and unpredictable, subject to various market and economic factors, both locally and internationally. Market risk, or systematic risk, refers to the specific risks associated with a particular market, including economic, geographical, political, and social factors. For example, the economy can turn bad at any moment, causing market indexes to lose significant percentages, as seen after the 2001 terrorist attacks and the 2008 financial crisis.

Interest Rate Risk

Changes in interest rates can affect stock prices. For instance, higher interest rates can lead to higher borrowing costs for companies, impacting their return on capital. Additionally, if you invest in a market with a currency pegged to another, like Hong Kong's peg to the USD, you are exposed to translation losses if your local currency appreciates against the pegged currency.

Global Risk

Stock markets, especially those that are highly open like Hong Kong's, are influenced by economic issues in major global markets. This means investors are exposed to economic events worldwide, and these should be factored into risk assessments.

Business Risk

The listed company you invest in may suffer a severe decline in profits or even go bankrupt due to factors like poor management, industry slowdown, or competition.

Corporate Mis-governance

The company you invest in may have improper management or make decisions detrimental to shareholders' interests, such as purchasing an overvalued asset.

Trading Suspension

A stock may be suspended from trading to avoid uneven information dissemination and insider dealing. During this time, you cannot buy or sell the stock, and its price may change due to market and business risk factors.

Liquidity Risk

Some stocks, particularly those with low capitalisation, may be hard or costly to liquidate due to low trading volume.

Currency Risk

If you are investing in a foreign market, currency fluctuations can affect your performance returns. For example, a strong Canadian dollar may hurt returns on foreign investments, while a declining Canadian dollar may boost them.

Policy Risk

Changes in government policies and regulations can significantly impact stocks in relevant sectors or industries.

Volatility Risk

If a stock price changes rapidly and significantly, it is considered more volatile and riskier as you could lose a lot if you need to sell quickly.

Inflation Risk

Also known as purchasing power risk, inflation risk refers to the chance that the cash flowing from an investment today will be worth less in the future due to changes in purchasing power caused by inflation.

Opportunity Cost

Opportunity cost refers to the potential gains from alternative investments. If you don't allocate your portfolio to achieve responsible investment growth, you risk leaving money on the table.

The best stocks to buy now

As of July 2024, here are some of the best stocks to buy now:

Spotify Technology S.A. (SPOT)

Analysts project that Spotify, the largest independent provider of streaming music content, will improve its gross margins, operating income, and free cash flow. Bank of America has given SPOT a "buy" rating and a $315 price target.

The Progressive Corporation (PGR)

Progressive is a leading U.S. auto and motorcycle insurance provider. Analyst Joshua Shanker says that Progressive will benefit from increased shopping activity for better insurance rates as auto insurance prices surge. Bank of America has given PGR a "buy" rating and a $265 price target.

Alphabet, Inc. (GOOG, GOOGL)

Alphabet is a global leader in internet search and online advertising and is the parent company of Google, Google Cloud, and YouTube. Analyst Justin Post is optimistic about Alphabet's integration of AI technology into its search engine, which could improve usage and monetization metrics. Bank of America has given GOOGL a "buy" rating and a $173 price target.

Intuitive Surgical, Inc. (ISRG)

Intuitive Surgical is a healthcare equipment company that developed the da Vinci Surgical System, which uses advanced robotics and computerized visualization technology to perform minimally invasive surgeries. Analyst Travis Steed believes that the success of Intuitive's new da Vinci 5 system could drive analysts to raise their earnings estimates for the company. Bank of America has given ISRG a "buy" rating and a $450 price target.

Tapestry, Inc. (TPR)

Tapestry designs and markets luxury accessories such as handbags, footwear, and fragrances under brands like Coach, Kate Spade, and Stuart Weitzman. Analyst Lorraine Hutchinson believes that Tapestry's stock is undervalued relative to its margin profile and cash flow generation. Bank of America has given TPR a "buy" rating and a $52 price target.

TopBuild Corp. (BLD)

TopBuild is a leading U.S. commercial insulation installer and specialty distributor. Analyst Rafe Jadrosich highlights productivity improvements, a favorable pricing environment, and acquisition synergies as factors that create opportunities for TopBuild to expand its margins. Bank of America has given BLD a "buy" rating and a $475 price target.

Citigroup Inc. (C)

Citigroup is one of the largest U.S. banks and a diversified financial services company. Analyst Ebrahim Poonawala believes that Citigroup's stock is attractively valued, and the company has a target to reach a 10% return on tangible common equity by 2026. Bank of America has given Citigroup a "buy" rating and a $65 price target.

The Kraft Heinz Company (KHC)

Kraft Heinz is one of the world's largest consumer packaged food and beverage companies, owning brands like Kraft, Heinz, Oscar Meyer, and Maxwell House. Analyst Bryan Spillane expects Kraft Heinz's year-over-year growth numbers to jump in the second quarter. Bank of America has given KHC a "buy" rating and a $40 price target.

Fidelity National Information Services, Inc. (FIS)

Fidelity National is a leading global provider of financial technology solutions for merchants, capital market firms, and banks. Analyst Jason Kupferberg believes that the company's sale of its majority ownership stake in Worldpay will position it well to generate significant recurring revenue. Bank of America has given FIS a "buy" rating and a $79 price target.

Amazon (AMZN)

Amazon has become a diverse household name, expanding into lucrative positions in cloud computing, video streaming, digital advertising, and artificial intelligence (AI). Amazon's revenue rose 13% year over year to $143 billion in the first quarter of 2024, and its operating income more than tripled. Amazon's quick recovery from macroeconomic headwinds in 2022 and its diverse business model make its stock a compelling option.

Apple (AAPL)

Apple, another well-known household name, has an exciting plan to boost product sales with its new AI platform, Apple Intelligence. Apple's share price has increased by 17% since its Worldwide Developer Conference (WWDC) on June 10, 2024. Apple's deep economic moat is driven by a walled garden of products and a reputation for quality.

The difference between growth and dividend stocks

When deciding whether to invest in growth or dividend stocks, it is important to understand the differences between the two. Here are some key points to help you make an informed decision:

Dividend Stocks:

Dividend stocks are offered by mature and steady businesses that have healthy profits and choose to return a portion of those profits to their investors. This is done through dividend payments, which provide investors with a stream of income in addition to potential market value growth. Dividend stocks tend to be less risky than growth stocks because these companies are typically more established and financially stable. Examples of strong dividend-paying companies include Coca-Cola and AbbVie. Dividend stocks are generally recommended for investors with a shorter time horizon who are seeking more liquidity and consistent cash flow. The main advantage of dividend investing is that it offers a chance for immediate returns and steady cash flow. However, it is important to carefully evaluate the payout ratio and ensure that the company has stable cash flow to cover dividend payouts comfortably.

Growth Stocks:

On the other hand, growth stocks are offered by companies that reinvest their profits back into the business to fuel future growth and expansion. These companies often focus on finding new growth opportunities and entering new markets rather than paying dividends to investors. Growth stocks are typically more volatile and carry more risk than dividend stocks, but they also offer the potential for higher returns. Examples of growth stocks include The Trade Desk and Tesla. Growth stocks are generally recommended for investors with a longer time horizon who are comfortable with higher risk in exchange for the potential for significant gains. The main advantage of growth investing is the opportunity for long-term capital appreciation and higher returns over time.

Key Differences:

The main difference between growth and dividend stocks lies in how the company chooses to allocate its profits. Dividend stocks provide regular income through dividend payments, while growth stocks focus on reinvesting profits for future growth. Dividend stocks are often seen as less risky and more suitable for investors seeking steady income, while growth stocks are more volatile and attractive to investors seeking higher returns over the long term.

Ultimately, the decision between growth and dividend stocks depends on your investment goals, time horizon, risk tolerance, and financial circumstances. It is important to carefully consider these factors before making any investment decisions.

Frequently asked questions