Is there anything more exciting than getting in on the ground floor of an amazing opportunity? Imagine you’re Eduardo Saverin meeting up with and partnering with another Harvard student named… Mark Zuckerberg.
As times change and technology advances, new industries and opportunities regularly arise. Can you name a few enormous new markets that were opened up over the last several decades? They include the Internet, wireless communications, smart phones GPS mapping and clean energy.
When a new market opens, some corporations, often small, young, and able to act quickly, dive head first into the void in the hopes of emerging as the leader. It should go without saying that profits must be reinvested to grow the business as fast as possible. As these corporations establish themselves as players in the new market, we call them emerging growth stocks.
These corporations, often because they’re very small, may be able to ride the new market’s growth and double, triple or quadruple themselves in a short period of time. The value of your stock may do the same! That’s the best scenario, so hold on for a reality check.
The negative scenario is that the emerging growth stock you purchased is swamped with an array of similar competitors and just cannot get enough traction to be profitable. Further, even if the corporation has sold offerings in the new market, there’s no guarantee that the new market will take off as predicted. There is a much greater chance of this scenario playing out.
|Suitable for||Young, aggressive investors who want to take a small portion of their investable assets and try to hit a home run.|
|Examples||GoPro (GPRO), Fitbit (FBIT), and 3D Systems (DDD).|
|In the news||Prepping for a rapid-fire launch, Kite Pharma gets a pass from FDA on axi-cel panel review – September 2, 2017
Garmin, Samsung Join Fitbit in Season of Wearables, Says Raymond James – September 1, 2017
|Connections||An emerging growth corporation, if it can manage to be one of the top few in a market that continues to expand, can become a growth corporation that may be able to reel off a decade or two of above average growth.|
|Explorations||The financial press is always on the look-out for the “next big thing.” Be wary of the hype machine. Remember 3D printers? Wow, you’d be able to design and print your own smart phone case! But, as explosive growth in the 3D printer market never materialized, pundits made the excuse that they were too expensive for families to purchase. Once the price got down to $1,500 or under $1,000, demand would soar. But it never happened.
Similar stories can be told about the market for fitness wearables, action cameras, and consumer drones. Research each of these markets and determine why they have stalled as well as what that’s meant for the emerging growth corporations that are the leaders in these markets.
Biomedical corporations, ones on the leading edge of new approaches to treating illness, would be best categorized as emerging growth stocks. Many of these corporations, however, are working on a single drug for a single illness. If the company or the Federal Drug Administration (FDA) announces that trials have shown it to be ineffective, that will lead to epic losses for the shareholders. Imagine losing 80% of the value of that investment in a moment and you get the idea.
|A final word
|There’s a great express in business that is appropriate to use when discussing why an emerging growth stock failed due to demand in the market not soaring as predicted: “there’s no there there!”|