Chasing growth is the goal of most investors. And there are many different types of strategies that can be employed to get large gains when it comes to growth stocks.
However, big rewards often come with big risks. In this article, we look at four growth investing strategies that can be used with the growth stocks listed on the Robinhood trading platform’s Top 100 most popular stocks list.
Applying these trading strategies to popular stocks on Robinhood could yield sizable returns for beginner and experienced investors.
- Emerging Markets
- Momentum Stocks
- Options Trading
- Micro-Cap Stocks
Growth Investing Strategies: Emerging Markets
Emerging markets tend to be a high risk, high reward area to invest in. Investing in companies based in South America, Eastern Europe, Pakistan, India and China can offer growth potential for aggressive investors who have an appetite for risk.
China, in particular, has a number of companies that have been providing big returns to investors over the past few years. One of them that is high up on Robinhood’s Top 100 list is Alibaba (NYSE:BABA), the e-commerce giant that is often referred to as the “Amazon of China.” Since March, BABA stock has risen 75% to just under $310 a share.
Some analysts see this stock rising more than 600% in the next 12 months. That’s huge! But investors need to be aware of the risks when it comes to emerging markets.
Governments are often not as stable in emerging market countries and regulatory oversight can be lacking. Fraud, corruption and misinformation can run wild. In countries such as China, just as many publicly traded companies implode as succeed.
Case in point: Luckin Coffee (OTCMKTS:LKNCY). Billed as the “Starbucks of China,” Luckin Coffee earlier this year was trading on the New York Stock Exchange for more than $50 a share. But after an accounting scandal was revealed at the company, the stock was delisted in the U.S. and now trades “over the counter” for under $5 a share, a drop of 90% in a few months.
There are several exchange traded funds (ETFs) that can be used to invest in emerging markets, such as the Global X MSCI Pakistan ETF (NYSEARCA:PAK) and the iShares MSCI Poland ETF (NYSEARCA:EPOL). These emerging market ETFs have enjoyed solid runs since stock markets around the world nose dived in March. The Pakistan ETF has risen 42% since March, while the Poland ETF is up 25%. For big growth, it can pay to look overseas.
There’s no shortage of momentum stocks on Robinhood’s Top 100 list. In fact, one good argue the list is made up of mostly momentum stocks, which are stocks whose price has been rising very fast.
Companies whose stock has proven to be extremely popular with Robinhood traders tend to be momentum stocks. Companies such as Tesla (NASDAQ:TSLA), Zoom Video (NASDAQ:ZM), Peloton (NASDAQ:PTON) and Draftkings (NASDAQ:DKNG) have each seen their stock price rise more than 300% this year. ZM stock is up 564% year-to-date. These are huge momentum stocks that continue to defy expectations and run higher and higher.
There are two ways to look at momentum stocks. Bulls tend to take the view that stocks that have run higher will continue to do so, while bears caution that momentum stocks are overvalued and may run out of steam, correcting sharply and costing investors money.
Some of the most successful investors caution against chasing momentum stocks. If you didn’t buy Zoom stock when it was trading at $68 a share in January of this year, don’t buy it at $451 a share in November. However, for investors seeking big growth, momentum stocks can be irresistible.
The key is to look at the companies of momentum stocks and try to assess whether they are likely to continue rising. Will Tesla be able to maintain its momentum as it faces increasing competition in the electric vehicle market? Will Zoom be trading over $500 a share once there is a vaccine against Covid-19 and people return to the office? These are the kinds of issues you want to weight when investing in momentum stocks.
Options trading is when investors bet on whether they feel a stock’s price is going to rise or fall over a certain period of time, say within one to six months. With options contracts, investors pay a premium in order to buy or sell a stock or other security at a predetermined price at any time during the duration of the contract.
Options contracts can be beneficial provided that a stock’s price moves in the direction that an investor expects. Many of the stocks found in Robinhood’s Top 100 are popular with options traders, including semiconductor company Nvidia (NASDAQ:NVDA) and online payment company Square (NYSE:SQ).
When engaging in options trading, it is wise for investors to think about the direction they see the entire market moving in coming months, as stocks tend to rise and fall with the wider market or within specific sectors.
Volatility plays a big part in options trading. The more volatile a stock’s price (how often it rises and falls) can make it harder to predict which direction it will ultimately move and it can be riskier for investors. When trading options, stocks with high volatility are more expensive than those with low volatility. Investors with a high risk tolerance who are chasing growth might be comfortable trading options of volatile stocks. But investors with a lower risk tolerance may want to consider trading options of more stable stocks.
Before buying an options contract, look at the historical volatility of the security to see how it has fluctuated over a one or two-year period.
With micro-cap stocks, we’re talking about publicly-traded companies that have a market capitalization between $50 million and $300 million. Micro-cap companies are high risk because many of them have unproven products, no solid history, assets, sales or even operations.
Lack of liquidity and a small shareholder base also can expose stocks of micro-cap companies to price shocks. Examples of micro-cap stocks found on the Robinhood Top 100 are companies such as biotechnology company iBio (NYSEAMERICAN:IBIO). While risky, these types of micro-cap companies also tend to outperform the broader stock market during bull runs. For example, from 2008 to 2018, the Dow Jones Select Micro-Cap Index provided an annualized return of 11.6%, while the S&P 500 Index returned an annualized 10.37%.
Investing in micro-cap stocks can inject a portfolio with big growth. However, it can be risky to invest in individual micro-cap companies. IBIO stock, for example, ran up more than 2,000% earlier this year, reaching a high of $6.41 a share before crashing down to under $2 a share today.
To mitigate some of the risk while still earning growth off micro-cap companies, investors may want to consider putting money into one of several micro-cap exchange traded funds. Most of the major fund companies offer at least one micro-cap ETF. And they have been performing well this year. The iShares Micro-Cap ETF (NYSEARCA:IWC), for example, is up 72% since March of this year and has risen steadily in recent months.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.