Top 10 growth stocks on the ASX in 2020

What is a growth stock?

A growth stock refers to a company that is expected to see its financial performance and share price grow at a rate ahead of the market average.

With that in mind, growth stocks are often smaller companies, have elevated revenue and earnings expectations from the market and tend to reinvest the majority of their profits directly back into the company. As a result of this, growth stocks also typically don’t pay out dividends.

Secondly, investors should also realise that because growth stocks are often in the early stages of their life cycle – or operating in new and ever-changing business areas – for many fast-growing companies their grand ambitions often fail to become reality. Because of this, growth stocks generally have a higher risk profile than other investments. Of course that also means that they also offer potentially higher rewards – should a company successfully execute on their ambitions.

For every Amazon, Google and Netflix that have made it big, there is a raft of ‘growth stocks’ lost to the investment history books.

Growth vs value stocks: what’s the difference?

Another way to think about ‘growth stocks’ is to look at how they compare to ‘value stocks’.

Indeed, if value stocks trade on low-multiples, inhabit out of favour industries and are seen as inherently boring – growth stocks represent the exact opposite. That is, they tend to trade at above market multiples, in cutting edge industries and they are the opposite of boring: both their business models and the prospect of investing in them seems exciting!

Yet the reality is growth and value stocks aren’t exactly opposites. Looking at some of Australia’s ‘Top 10’ growth stocks below we see that such contrasts – while helpful – can also be misleading. Not every growth stock is a flashy tech stock; and nor are they always part of the next ‘BIG’ trend.

It was Warren Buffet after all – an investor who many associated with a strict value approach to investing – who said:

‘In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.'

Top 10 growth stocks on the ASX right now

Now that we have touched on what a growth stock is, we take a look at the ‘Top 10’ growth stocks that investors, speculators and traders can take advantage of on the ASX right now.

1. Xero (XRO)
2. A2 Milk (A2M)
3. Wistetech (WTC)
4. Afterpay (APT)
5. Altium (ALU)
6. Appen (APX)
7. Pro Medicus (PME)
8. Nanosonics (NAN)
9. Nearmap (NEA)
10. PointsBet (PBH)

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Xero (XRO)

Based in New Zealand, Xero is a software company that specialises in developing online accounting systems. Its systems are widely used by New Zealand, Australia and increasingly international businesses. The software itself offers features such as financial reporting tools, accounts management tools, and bank transaction facilities.

A2 Milk (A2M)

A2 Milk (ASX: A2M) is a consumer stock, which has found its niche in selling dairy products which is free of the protein ‘beta casein a1’. The company sells its product in Australia and right across the globe, however has found a strong demand in China, where the company’s infant formula has proven highly popular.

Wisetech (WTC)

Another of the ASX’s famous 'WAAAX' companies, Wisetech Global (ASX: WTC) integrates technology with logistics solutions. It designs and develops cloud-based logistics software solutions to a worldwide market place. The company’s software offers several applications, including forwarding, custom clearance, warehousing and transport solutions.

Afterpay (APT)

Afterpay (ASX:APT) positions itself as an industry disruptor. Classified as a consumer finance firm, Afterpay offers a buy-now-pay-later platform, designed for the payment of goods ranging from clothing, car parts, shoes, luxury items, food and beverage, sports, and variety of other products. Though the company serves clients throughout Australia it also possesses global ambitions, with a rapidly expanding presence in both the US and the UK.

Altium (ALU)

Altium (ASX:ALU) is a computer hardware business which develops electronic design software for the Microsoft Windows operating system. Its products are used by companies in the telecommunications, automotive, science, consumer electronics and defence industries, and are designed to facilitate and support the design of various electronic products.

Appen (APX)

Appen (ASX: APX) is classified as an IT services company. It specialises in language, search and technology firm, providing solutions designed to improve internalisation of products, data management, and project management for companies. The company’s offering also includes machine learning and artificial intelligence products.

Pro Medicus (PME)

Pro Medicus (ASX: PME) describes itself as a leading imaging IT provider. Catering to large medical corporations, as well as individual medical group practices, Pro Medicus specialises in proprietary software and IT solutions. These solutions include billing and management systems for diagnostic imaging providers and clinical reporting systems.

Nanosonics (NAN)

Classified as a medical devices company, Nanosonics (ASX: NAN) researches, develops and commercialises technologies specialising in infection control and decontamination. The company defines itself as ‘setting the new standard of care globally’, especially as it applies to its best known product – a disinfection and sterilisation technology for ultrasound probes.

Nearmap (NEA)

Nearmap (ASX: NEA) is an information services company. It’s involved in the geospatial mapping market. Supporting government and corporate customers, primarily through its online based mapping content, Nearmap provides aerial imaging of large swathes of the Australian, United States and New Zealand populations.

PointsBet (PBH)

PointsBet (ASX: PBH) is a fast-growing ‘Corporate Bookmaker’ with operations based in the US and Australia. As the company notes, it makes use of 'a scalable cloud-based wagering Platform through which it offers its Clients innovative sports and racing wagering products.' Since listing on the ASX in June 2019, the company has already seen its share price more than double.

*Revenue Growth (LTM), analyst ratings and price to sales (PS) data all sourced from Bloomberg Data. Market capitalisation and YTD share price performance data sourced from the ASX.

How to find and pick growth stocks

Stock picking is often viewed as a combination of art and science. With that in mind, we look at the some of the general criteria an investor may look out for when picking growth stocks.

• Examine current and future trends: often the most growth comes from trends that have yet to fully take off yet. For example, while the buy now pay later trend was in its infancy just a couple of years ago – it has exploded in popularity in recent times – and sent the share prices of companies like Afterpay, Zip and Splitit soaring.

• Examine revenue growth from the last 12 months (LTM) or even a quarter-over-quarter basis. For a growth stock, you generally want a double digit (or higher) growth figure, at minimum.

• Screen for small and mid-cap growth opportunities. While larger companies do have the ability to grow revenue and earnings quickly; it is, in most cases, more difficult to double $100 billion in revenue than it is to double $100 million, for example.

• Check to see what a company is currently doing with its capital. Is it reinvesting profits to grow the company with research and development or spending big on marketing to improve brand awareness? If not, the company may struggle to grow at an above-market rate.

How to trade and invest in growth stocks

Investors can buy, sell and trade any of the ‘Top 10’ growth stocks we’ve mentioned today by using IG’s market-leading trading platform.

How to invest in growth stocks

The primary reason and benefit of investing in growth stocks – over say dividend stocks – likely comes down to the potential for growth stocks to out-perform the broader market – in the short or even long term. The Afterpay (ASX: APT) share price, for example, has outperformed the broader ASX 200 benchmark by a significant margin – from January 2019 to November 2019 – rising 170% in that period, compared to the ASX’s gain of just 23%.

You can buy any of the ‘Top 10’ growth stocks we have discussed today through IG’s share trading platform by following the four simple steps:

• Open a share trading account with IG

• Log into the IG account and go to the ‘My IG dashboard’

• Fund your newly created share trading account. Open the classic platform on the share trading account, go to the 'finder' panel on the platform, type in and select which growth stock you would like to buy

• Click on the deal ticket: where the ‘on exchange’ option will appear. On exchange means interacting directly with the relevant exchange.

Of course, while growth stocks like Afterpay may have the ability to generate superior returns, such outperform often comes with elevated levels of volatility. Illustrative of this, the Afterpay share price fell almost 30% on two occasions during 2019.

Because of reasons such as this, growth stocks may not be the best option for conservative investors, though they may prove to be a great option for risk-tolerant investors; or traders looking to benefit from share price volatility.

How to trade growth stocks

For those looking to capitalise on the short-term price action of growth stocks and other assets – traders can utilise IG’s CFD trading platform.

Ultimately, trading CFDs gives an individual the chance to benefit from higher or lower price movements of an underlying asset. Additionally, as the Afterpay example we just examined shows: growth stocks can provide greater opportunities to benefit from higher levels volatility, open up more varied trading opportunities for experienced investors.

Of course, this volatility represents a somewhat double-edged sword. While a growth stock may favourably move for a trader in short-order – they can also move against a trader in an equally short time-frame. Such issues may be further compounded when trading with CFDs given that they are leveraged products. Though your potential gains may be maximised, so to may your losses.

If you want to trade any of the ‘Top 10’ growth stocks we have discussed today, you can utilise IG’s CFD trading platform to can speculate on the share price movements of the underlying asset – both up and down. In this case, you would ‘buy’ – take a long position – if you think a growth stock’s share price will rise; or you would ‘sell’ – take a short position – if you think the share price will decline. For example, if you anticipate that any of the growth stocks we have discussed today will decline in value, you could take the following steps to ‘sell’ or SHORT them:

• Create an IG trading account or log in to your existing account

• Look for the growth stock you believe will decline in value in the search bar

• Choose your position size

• Click on ‘sell’ in the deal ticket

• Confirm the trade

What to bear in mind before trading growth stocks:

Importantly, because growth stocks tend to represent companies at the early stages of their life cycles, investing in them is often considered riskier, or even speculative in nature.

For one, their business models may prove unsustainable or the emergence of other competitors may eat into their growth plans – disrupting their ability to sustainably grow their business in the long term.

Secondly, growth stocks often become valued not on the basis on their current operations; but on the idea of their future growth/ market dominance. If a company can keep up with the market’s growth expectations, its likely (though not assured) that its share price will continue to rise. For example, while Afterpay’s share price has continued to break new highs in the last year – many bearish market commentators have suggested that Afterpay’s valuation has run away from its fundamentals.

Yet investors seem willing to pay little attention to such concerns as long as Afterpay continues to deliver strong growth figures. One can only speculate what would happen when the growth finally starts to slow down.

Moreover – if expectations around a company’s future prospects become too distorted, a company can fast run into trouble.
A2 Milk (ASX: A2M) for example, recently saw its share price savaged by investors in the wake of its full year (FY) 2019 results. A2M – already demonstrating good growth for a number years saw its share price bid to all-time highs of $17.13 per share in July 2019. A small miss on earnings and the company flagging that it expected lower margins in FY20 was all it took for investors to bid the stock down in fast fashion. From July to November the stock declined 33%.

The point here is simple: markets can be fickle on the way up and down when it comes to growth stocks.

Growth stocks summed up

Growth stocks can be a great avenue for traders and investors to take advantage of rapid capital appreciation and/or price volatility in young and exciting new publicly listed companies. Overall, when thinking about investing in growth stocks investors should remember that:

• They tend to be smaller companies and may be prone to volatility
• They often don’t pay dividends
• The usually reinvest profits directly back into the company or into marketing initiatives
• They potentially offers investors above market average returns – at a higher risk

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