Growth investing requires selecting companies that are likely to increase the initial investment by ten times or more.
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Active investing will earn greater returns in a volatile market. That’s not just my opinion, but a view in the Australian Financial Review back in 2018. Moreover, I believe active management in growth investing is always more effective. This is even more valid when markets are as volatile as they have been this year.
Growth investing is specifically aimed at finding companies that are likely to see fast share price growth in a relatively short period of time. For example, if you had invested $10,000 into Northern Star Resources Ltd (ASX: NST) on 10 January, 2010 it would have been worth more than $3.7 million on 2 January, 2020. Growth shares rarely pay dividends, at least not in the early days, and they are increasingly hard to find.
Here are a few guides to finding good growth shares in 2020, along with some recommendations where I would invest $2,000 each.
The market for growth investing
Any good growth share needs a large addressable market. For example, much of the hype around Afterpay Ltd (ASX: APT) has been based on the large potential market. Another share with a large addressable market is BrainChip Holdings Ltd (ASX: BRN). Unfortunately, it is no longer one of the best kept secrets on the ASX.
BrainChip is an artificial intelligence (AI) company. It already has products in the market that have been deployed for security purposes in several sectors. This includes systems for facial recognition of known criminals and terrorists, as well as monitoring casino tables.
Most recently it has entered into proof of concept partnerships for its neuromorphic chip. This is a first of a kind technology that will be a step change to AI capability. Already it is working on NASA partnerships, as well as gaming, autonomous vehicles, and smart cities. This is obviously a massive addressable market, and it is still growing.
The competitive ‘moat’
The moat is a term coined by Warren Buffet to define a company’s barrier to entry. For instance, while Afterpay and the other buy now, pay later companies have a massive addressable market; very few of them have anything like a competitive advantage.
Moats can come in many forms, however I have always favoured growth shares with valuable intellectual property (IP). To illustrate, BrainChip, which already has a large addressable market, also has much of its value locked up in patents and IP. Another company that has a strong moat due to intellectual property is Recce Pharmaceuticals Ltd (ASX: RCE).
Recce (pronounced “Recky”) has been pioneering a new line of synthetic antibiotics through painstaking research and development, . The company is specifically targeting super-bugs that are resistant to orthodox antibiotics. Another of the company’s targeted infections is sepsis, or blood poisoning. In 2017, according to The Lancet, sepsis killed 11 million people globally amid 48.9 million reported cases, yet still there is no treatment for it.
As with all growth investing opportunities, Recce has a fantastic competitive advantage built from its hard fought and won IP. It also has a great and diverse addressable market.
Customers are likely to buy products from each company several times. Another example of this could be Jumbo Interactive Ltd (ASX: JIN). Jumbo sells lottery tickets online for Tabcorp Holdings Limited (ASX: TAH), charities and councils and schools globally. As a lottery seller it is the consummate repeat purchase product.
What is more, the addressable market is quite large. Within Australia, 28% of lottery sales are online, globally it is closer to 10%. Moreover, just the charity lottery sales alone are worth $26 billion. Lastly, it has a fantastic moat or barrier to entry. That is, the government restricts and regulates lottery sales. As a solid growth investing opportunity, Jumbo has a lock on most of these within Australia already. Moreover, it increases its exclusive representation with every charity and third party it signs up.
For anyone focused on growth investing, you will need a share price to grow by at least 10 times the original investment, or a ten bagger. I believe that each of these companies are likely to be at least ten bagger companies over the next 3 – 5 years. Each of them has a large addressable market and a strong competitive advantage. However, it is the repeat purchase nature of their products that will allow them to grow almost exponentially in the years to come.
Where to invest $1,000 right now
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Daryl Mather owns shares of Recce Pharmaceuticals Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.