| Growth Stocks with the Most Momentum | |||
|---|---|---|---|
| Price ($) | Market Cap (B) | 12-Month Trailing Total Return (%) | |
| Applied Digital Corp. (APLD) | 9.67 | 0.9 | 706 |
| TG Therapeutics Inc. (TGTX) | 23.71 | 3.5 | 440 |
| Immunovant Inc. (IMVT) | 20.50 | 2.7 | 439 |
| Russell 1000 Index | N/A | N/A | 12 |
| SPDR Portfolio S&P 500 Value ETF (SPYG) | N/A | N/A | 14 |
Source: YCharts
- Applied Digital: This company operates data centers and provides digital infrastructure to the performance computing industry. On May 19, the Dallas-based company’s stock surged nearly 80% shortly after announcing its recently launched artificial intelligence (AI) Cloud Service has secured its first major AI customer with an agreement valued at up to $180 million. Since that time, the price has continued to gain as investors and traders look to join the momentum.
- TG Therapeutics: It focuses on the acquisition, development, and commercialization of novel treatments for B-cell diseases. In June, the company announced the European Commission (EC) granted approval of its multiple sclerosis drug BRIUMVI, following on from the FDA’s approval of the same drug in the fourth quarter of last year. These positive developments have helped the company’s share price more than double since the start of 2023.
- Immunovant: It researches and develops monoclonal antibodies for the treatment of autoimmune diseases. The company’s stock price started to gain momentum in the second half of 2022 after its monoclonal antibody therapy showed promising results in clinical trials. However, in the most recent quarter, the company’s research and development expenses jumped 62% YoY due to personnel-related expenses and higher development costs.
Advantages of Investing in Growth Stocks
Capital growth potential: Growth stocks have the potential for significant capital gains, as they represent companies operating in high-growth industries or companies that have recently undergone significant restructuring to capture new markets. Many growth companies have a greater potential to capture a larger market share and generate high profits.
As these companies continue their growth trajectory, their earnings typically increase, which can lead to a rise in stock prices. Due to these factors, investing in growth stocks often means investors enjoy significant capital gains over a shorter period than with other investments, such as value stocks. For example, bellwether technology growth stocks like Apple Inc. (AAPL), Microsoft Corp. (MSFT), and Amazon Inc. (AMZN) have 10-year annualized trailing returns of 29.74%, 26%, and 24.81% over the past 10 years, respectively, significantly outperforming the S&P 500’s 12.57% gain over the same period.
Diversification opportunities: Investing in growth stocks gives investors the opportunity to diversify their portfolios, as these companies operate in many different sectors, such as technology, health care, finance, and consumer goods. Growth stocks’ gain in one sector may help offset losses in another, depending on what stage of the economic cycle the economy is in.
Holding growth stocks also allows investors to strike a balance between chasing larger capital gains and seeking income. For example, if an investor’s portfolio only consists of value stocks or other investments focused on consistent income, adding growth stocks helps provide exposure to companies with the potential for rapid earnings growth and capital appreciation. This added diversification can improve long-term portfolio performance and reduce overall risks.
Risks of Investing in Growth Stocks
Price volatility: Growth stocks have a propensity for market volatility that can add risk to an investor’s portfolio if not managed properly. They are often subject to rapid price swings and large sell-offs, particularly during market downturns.
For instance, the SPDR Portfolio S&P 500 Growth ETF slumped 12.6% during the April 2022 selloff, whereas the SPDR Portfolio S&P 500 Value ETF (SPYV) shed just 4.9% over the same period. As a result, investing in growth stocks can be psychologically challenging, requiring investors to be comfortable with short-term volatility in the pursuit of long-term gains. Those who invest in growth stocks need to be well-informed and analyze a company’s fundamentals to ensure it can survive and prosper in all economic conditions. This additional research allows investors to mitigate some of the risks associated with growth stocks’ heightened volatility.
No dividends: Growth stocks typically don’t pay a dividend. Dividends represent a share of the company’s profits that are distributed to the investors. When a company pays a dividend, it provides a regular source of income for investors and can also help to stabilize the stock price. Instead of returning profits to investors through a dividend, growth companies usually retain those earnings to reinvest back into growth initiatives, such as entering a new market or purchasing new equipment.
Although this often benefits investors longer-term through share-price appreciation, it can be frustrating for investors seeking steady income from their investments. As mentioned above, investors can achieve both capital growth and income generation by holding both growth and value stocks in their portfolios.
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As of the date this article was written, the author does not own any of the above stocks.