Should You be Interested in Fast Grower Stocks?

Legendary investor Peter Lynch came up with 6 major stock categories. Lynch used these six categories to set reasonable expectations for a company.

The six categories include fast growers, slow growers, stalwarts, turnaround, cyclical, and asset plays. Companies don’t have to fall into a single category and can shift into a different category during their lifetimes.

Today, I want to focus on the category of the fast grower category. Here are some things investors should keep in mind about these promising stocks.

What qualifies as a fast grower?

Fast growers are companies that grow earnings at an annualized rate of at least 20-25% each year.

An example is Wuxi Biologics Cayman Inc (SHEK:2269), which is listed on the Hong Kong market. Wuxi Biologics is a pharmaceutical manufacturer with a market capitalization of HKD$129.8 billion.

The company provides its customers with a biologics technology platform that offers end-to-end solutions for the discovery, development, and manufacturing of biologics. Biologics have seen massive growth over the past decade. This trend is set to continue well into the future, with numerous clinical trials ongoing.

All the approved drug candidates must be produced at scale. This is where Wuxi Biologics comes in.

Wuxi Biologics’ success can be seen from its eye-popping compounded earnings growth of 99.9%, with net profit increasing from RMB$252.6million in 2017 to RMB$1,010million in 2019.

This puts it firmly in the fast grower category.

What should investors expect from fast grower companies?

This category is where investors expect to find multi-baggers. Investors should also keep in mind that such growth carries more risk and volatility.

The risk comes from the company failing to deliver to the high growth expectations of the market, resulting in volatility.

When should investors sell a fast grower company?

The best time to sell a fast grower is when growth appears to be tapering.

Some signals that could indicate this is occurring is the emergence of stronger competitors or earnings falling to mirror the market average.

That considered, if any company has grown dramatically, investors might want to reevaluate the company to see if its better fits in a different category.

Who should buy fast grower stocks?

Fast growers should be part of any young investor’s portfolio, considering these investors have the luxury of time.

This allows them to enjoy the growth the company may achieve in the long-term, resulting in larger returns.

Older investors might also consider these investments, either for themselves or as investments for their kids.

Foolish conclusion

Peter Lynch is one of the most accomplished investors out there.

His methodology of grouping companies into categories serves to help investors better understand how to evaluate a company.

Fast grower companies have a lot of potential and investors should be interested in them based on this alone. That said, referring to Lynch’s methodology could also come in handy for diversifying one’s portfolio.

Investors need to make sure that they don’t pick only fast grower companies, since this would make their portfolio high risk.