A fund manager reveals how to spot a good growth stock

After a terrible 2022, growth firms have been having a comeback. And amid the banking turbulence, the tech particular industry — a favorite amongst investors looking for exposure in growth companies — has been a bright spot.

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The failure of Silicon Valley Bank sent shockwaves through the market, boosting the tech-heavy Nasdaq Composite by around 5.8% since March 10. That is an increase above the S&P 500's 2.3% gain during the same time frame.

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Nonetheless, Ian Mortimer isn't overly concerned about the current state of the market. "We are considering the long term. We're sort of taking a [view] of three to five years. We are not attempting to trade on a daily or weekly basis market swings, he said on Trade Algo.

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The Guinness Global Innovators Fund, which invests in companies like Nvidia, Applied Materials, and Microsoft, is managed by Mortimer and focuses on growth and innovation. "One of the things we're trying to consider as growth managers is how to recognize good growth businesses. He said, "

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“Because basically what we’re looking to identify are firms that expand faster than that of the market. Companies of that nature will perform better, he noted.

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How to select quality stocks

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Mortimer chooses equities using a two-pronged strategy.

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Finding organizations exposed to themes that, in his words, offer "strong avenues for growth," is the first step in the process.

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He emphasized that not all fascinating or creative businesses make for wise investments. Mortimer uses a bottom-up technique to screen out unsuitable companies, leaving just those with earnings and those that don't need "substantial" leverage.

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While assessing possible investments, Mortimer advised using "valuation discipline." He claimed that paying too much now for future growth is one of the major risks of growth investment.

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He added that it is very difficult to anticipate future growth and that past growth is not necessarily a good indicator of future growth.

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In other words, if you follow a stock up and forecast extremely high future growth, you run the danger of receiving a substantial derating if the growth isn't as high as anticipated, he advised.

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Mortimer highlighted Wall Street studies that demonstrated successful outperforming companies were also selling at a discount to the market. These businesses eventually experienced a multiple re-rating that increased their share prices as well as a significantly higher rate of growth in earnings.

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"What we would argue is that valuation control becomes incredibly crucial for your analysis of total results when you look at a fundamental equity growth portfolio," they say. And it need not prevent you from discovering some of those very intriguing companies that have the potential to appreciate greatly, he added.

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"It's about minimizing the downside risks of your business while maximizing the upside. That balance, in my opinion, is crucial, Mortimer continued.

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