The label "growth stock" can mean different things to different people, but a business that can grow its earnings faster than the market, at a sustainable rate over a three-year horizon ticks several growth criteria.
It is also important to look at the company specific factors that affect the prospects of each business, as no two growth stocks are created alike. For example, one growth stock may be in a new industry, with few competitors, while another may be growing rapidly but in an industry where market share is low and the number of competitors is huge.
The three companies on this list have attractive growth prospects and supportive industry dynamics.
Capilano Honey Ltd (ASX: CZZ) is the owner of the Australian supermarket staple, Capilano Honey. The company has one of the more spectacular stories of the past few years, growing over 300% from this time two years ago.
Honey is experiencing an uptick in demand as a natural sweetener on its own and in recipes, as western countries move away from highly artificial and sugary additives due to increased awareness of adverse health consequences.
In addition, the global honey industry is suffering from a serious problem called colony collapse disorder, which is causing bee populations to be decimated, which has obvious knock on effects resulting in decreased production of honey. Due to stringent customs standards and our isolation, Australia, and Capilano, have escaped the worst of this problem to date, while the contraction in supply has caused the price to rise.
While the listed legal sector has had no shortage of detractors lately, there are still bright spots to be found. IPH Ltd (ASX: IPH) is a listed legal play that operates in a huge growth industry: intellectual property (IP) protection.
Unlike competitors, IPH does not operate in low-margin, high-volume areas like accident and injury law. Its focus is higher margin work in the intellectual property arena. IP is an attractive area as it often involves recurring revenue from clients through the cycle of registration, growth and enforcement of IP rights.
In addition, IP will be more important to businesses of all sizes going forward as trademarks, brands, copyright and patents form the competitive advantage of products ranging from wine to electrical circuit boards.
In the tradition of several world-leading medical companies with roots in Australia, Sirtex Medical Limited (ASX: SRX) has carved out a niche in the treatment of liver cancer.
The company is high-growth, as the current patient base should expand with increased awareness among prescribing doctors, while Sirtex technologies could also be potentially applied to other types of cancer treatment.
Sirtex is also one of the few companies on the ASX that can boast strong year-on-year sales growth without interruption for many years, with strong indications that the growth can continue into the future as more doctors adopt Sirtex treatment options.
Foolish takeaway
Growth companies can be fickle – one minute they are barreling upward at a seemingly unsustainable rate as scores of new investors become attracted to the story, while at other times they can fall heavily without any apparent reason.
Of the companies on this list, IPH appears to have the most defensible business model, while Sirtex has the most potential for growth of the three.
