We all dream of finding the perfect growth stock -- that investment that jumps enough to turn a modest lump sum into a four-year private college tuition. There's no surefire way to guarantee that every stock pick you make will be the next rocket stock, but there are definitely patterns that can help you pick big winners.
My search involved five key steps that can help you, too:
Find your edge
Look at the stocks of companies with products and services that you actually use. Chances are you've already done a good amount of stock research without even realizing it. For instance, I'm a health nut who loves to exercise and eat nutritiously, so I thought about where I like to go food shopping. Although a great product doesn't necessarily translate into a great stock, customer satisfaction is a fine starting point.
Buy what you believe in
Invest in an industry that you can identify with. Don't be persuaded into devoting your precious dollars toward whispers of "the next big thing," especially if you don't even understand what "the next big thing" is. In my case, I've noticed how my friends keep raving about Whole Foods
and its commitment toward providing organic products. (Nasdaq: WFM)
But after delving a little deeper, I noticed that Hain Celestial Group
, the manufacturer of my favorite MaraNatha products, also happens to be one of Whole Foods' main organic suppliers. Over the past two years, Hain Celestial's stock has doubled, and Whole Foods' stock has nearly tripled. You don't need to dabble in sectors you've never heard of when you can find a great stock within your own area of expertise. (Nasdaq: HAIN)
Look for the innovator
Warren Buffett once claimed that there are three I's to every industry: the Innovator, the Imitator, and the Idiot. I generally like to place my bets on the innovator. Although some will argue that the first company in an industry faces unexpected obstacles that imitating companies can dodge, I place immense value on a company's abilities to blaze new trails.
Imitators, like The Fresh Market
in health food, are often overvalued and lack the ability to evolve: The Fresh Market's current P/E of 68 is almost twice that of Whole Foods. Hot trends quickly peak and fall flat. As a long-term investor, I'm looking to put my money in a company like Panera Bread (Nasdaq: TFM) , which introduced a healthy alternative to the fast food industry -- and which continues to consistently update its customer experience. (Nasdaq: PNRA)
Check out the company culture
A business is merely the product of its employees. First and foremost, the CEO needs to instill the right culture and vision companywide. If the CEO is not even invested in his or her own company, then why the heck should I be? Look for CEOs who are also founders. Hain CEO Irwin Simon has helped his company grow organically into a retail giant.
Corporate culture also matters, because there is a strong correlation between employee happiness and performance. As a result, employers have even begun to implement "no-policy" vacation policies. Since people are a product of their environment, a more open environment will promote excellence and innovation.
Don't alleviate, allocate!
Consider the companies and concepts you've bought into. If you weren't invested in Whole Foods or Hain Celestial, where else would you put your money? Are there any other companies that you consider innovative enough to replace your current holdings? If not, stick with what you have.
Although United Natural Foods
is often grouped in the genre of health-related stocks, I think the business has overextended itself, attempting not only to distribute but also retail and manufacture organics. Even though United Natural has been profitable in the long term, I see no reason to buy shares. Try not to worry so much about the specific stock price of your investments; instead, focus on the health of the business itself. (Nasdaq: UNFI)
Foolish bottom line
Think of investing in a stock as buying a part of that business. Find great leaders in promising industries, and invest in them. Even though they're not creating cutting-edge technology, I see promise in "good-for-you" companies such as Whole Foods Market and Hain Celestial. If you invest in an innovative company with a clear vision and strong set of values, the stock price will soon reflect that. Wondering what other stocks have impressed us? Check out The Motley Fool's top stock picks for 2011.
Fool contributor Marissa Gitler doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Whole Foods. Motley Fool newsletter services have recommended buying shares of Panera, Whole Foods, and The Fresh Market. Try any of our Foolish newsletter services free for 30 days. 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.