Growth stocks to buy is a popular topic among stock investors. Along with its twin topic, value stocks to buy, investors always seek to identify where to put their money. The decision to invest in growth or value stocks depends on several factors. In this post, we will discuss what growth stocks are and walk through a method for identifying Nigerian growth stocks to buy. We will end the post with a list of growth stocks to buy today.
Points covered in this post include:
- Investor personas
- Investment objectives
- Investing styles for the 3 investment objectives
- Growth investment strategies
- Models for building growth investment strategies
- Growth stocks to buy for Nigerian investors
- Conclusion
Three investor personas
Let us introduce three unique characters. Growth Soji is 27 years old and graduated from university two years ago. Soji was recently promoted from his entry-level position at a popular fast-moving consumer goods company.
He learned about the stock market and has concluded that, without having to quit his job and become an entrepreneur, it is one of the best opportunities for him to reach financial freedom. He is going to work until the traditional retirement age of 60 because he loves what he does, not because he feels forced to do so for financial reasons.
Cash flow Pa. Francis has just retired at age 60. He has been saving part of his income during his entire career and has built up quite a fortune, which he is now planning to live off. He is healthy and not intending to have his ultimate retirement until he reaches at least three digits of age (100 years). So, he would like his capital to last as long as possible.
Bae Jemimah and her husband, boo Tony, are about to expand their little family from two to three, and in about two years, they think it will be necessary to upgrade from their current 2 bedroom flat in Ipaja, into a duplex in the Magodo. They have been renting until this point, so the cash for the house must come from their income. They have been saving for quite a while but still need more to afford the house they’ve set their eyes on.
3 investment objectives
When you are investing, it’s important to always have your primary aim in mind. The primary investment objectives are:
- Capital preservation
- Passive income generation and
- Capital growth
Which objectives do you think Soji, Pa Francis, and Jemimah have? Soji is looking for capital growth, Pa Francis for passive income, and Jemimah for capital preservation. A market investment, or security, can do one of these objectives well, but it often means sacrificing the other two.
Investing styles for the 3 investment objectives
Short-term bonds of high-grade (creditworthy) companies or bank deposits are great for capital preservation, but they are useless for passive income or capital growth.
Preference shares, bonds of lower grade (not as creditworthy and, higher interest rate) companies, and some types of ordinary shares are useful for the investor looking for passive income, but not so much for capital preservation or capital growth.
Finally, you can achieve capital appreciation with growth stocks, but not capital preservation or passive income.
Since you are reading this post, I assume that you are not at the stage of Pa Francis just yet. And since capital conservation is simple and boring, let us focus on finding stocks to increase the value of your portfolio like Soji aims to do.
Growth investment strategies
To find stocks that have the potential to increase the value of your portfolio, you need to use a growth selection strategy for stock selection. A growth investment strategy is any stock-picking strategy that has a goal of identifying companies that have good growth potentials. There are several factors that a growth investor will refer to. Some of these factors are:
- Earnings per share
- Return on equity
- Historical growth of earnings per share
- The projected growth of earnings per share
Growth investors are not usually interested in the current trading price of the company. They are interested in its potential growth over the medium to long term. Growth investing requires carrying out fundamental analysis and research into the background of the growth stock before making any investment decision.
Models for building growth investment strategies
Expert investors created several valuation models to filter out potential growth stocks from a universe of stocks. Some of these experts and their models include:
- William O’Neil’s CANSLIM strategy,
- James O’Shaughnessy’s Cornerstone Growth strategy,
- Robbie Burns’ Naked Trader Strategy
Investors can tweak these models, backtest, and applied them to any universe of stocks that a growth investor is interested in researching. For this post, we will focus on amending Robbie Burns’ Naked Trader strategy to stocks listed on the Nigerian Stock Exchange.
Growth stocks to buy for Nigerian investors
To create a model that identifies Nigerian stocks to buy for growth investors, we chose Robbie Burns’s naked trader model. This is a growth investing strategy based on the rules set out by Robbie Burns in his book, “The Naked Trader”.
We changed the rules to reflect the peculiarities of the Nigerian stock market. Our model of Robbie’s Strategy incorporates the following conditions:
- Market Capitalization is between ₦500 million and ₦100 (₦billion)
- Earnings per share growth (%) is positive
- Dividend per share growth (%) is positive
- Sales Growth (%) is positive
- One-year price change (%) is positive
- Price to 52-week low > 5%
- Price to earnings ratio < 20
- Net Debt < 5 * Operating Profit
When applied, the model produced a list of stocks. The growth stocks to buy for Nigerian investors are:
The strategy applied above is a rules-based investment strategy based on fundamentals. It looks for profitable & not highly levered (high debt levels) companies, with a good price to earnings ratio. The key assumption with this strategy is its belief that investors can achieve rapid and significant capital growth from the stocks identified in the long-term.
As simple as this model is, identifying and managing stocks that meet the model’s criteria requires understanding the stock market, and time to conduct the research process. Some investors do not have the time to collect, prepare, and model the data to build such models. If you are that investor, we’ve created an algorithm that recalculates the naked trader screener on the Investor Hangout.
Conclusion
Some Sojis may have read this far and be experiencing some disappointment. You may wonder, “wait, what? You mean I read this long only to get a list of 3 stocks?”. If you are that Soji, I understand your disappointment. My response, though, is that an objective and factor-based investment model, like the one applied, serves better than subjective stock-picking models. If this model shows that there are few investments that meet your demands (growth), maybe you should just accept that truth and look elsewhere. Maybe Nigerian stocks are not the best place to put your money today if you are looking for growth stocks. You could look into other investing models like quality investing models and value investing models. If you must buy growth stocks, maybe you should take a look at the growth board of the Nigerian Stock Exchange.
While this model is not a recommendation to buy, it provides a starting point for anyone looking for growth stocks in Nigeria. The ideal scenario will be for you to identify these stocks that show the characteristics that growth stocks should have. Then, you would proceed with further fundamental analysis to identify the qualitative properties that could provide you with an edge.
In conclusion, this post set out to identify Nigerian stocks to buy for growth investors. The results, based on the model used, identified three companies to buy for growth investors today. These stocks are UCAP, MAYBAKER, and FLOURMILL.
