High debt burdens make growth stocks an intriguing play
While many Canadians have managed their debt fairly well over the past 17 months, the pandemic has left some wondering how they'll dig out of the hole they've borrowed their way into.
If you’re among those with a dark cloud of debt hanging over you, injecting a bit of risk into your investment strategy in order to gain upside might be called for.
But before you do that, be sure to reduce your overall borrowing costs by transferring high-interest debt (like credit cards) to lower interest debt (like a line of credit or a refinanced mortgage).
Then you can start chipping away at your personal debt-to-equity ratio by investing in growth stocks expected to generate returns that outpace your interest costs.
Here are three rapidly growing companies that might help lighten your debt burden.
Canadian e-commerce platform Shopify has seen its share price explode 121% over the past three years.
With a current price-to-earnings ratio in the high 70s, Shopify shares aren’t cheap. But this already thriving company still has plenty of upside.
Shopify has benefited greatly from lockdowns that pushed consumers online. And it’s a trend that shouldn’t slow anytime soon.
Even at these elevated levels, Shopify’s stock continues to be supported by strong financial metrics. Its year-over-year revenue and subscription growth of 57% and 70%, respectively, both topped stock watchers' expectations.
2. Spotify Technology
Spotify Technology is another growth stock that might be worth paying attention to.
The Swedish music streaming platform saw its total revenue increase 23% year over year in the second quarter of 2020. The drivers were significant growth in the number of premium subscribers and advertising revenue.
Spotify hasn’t experienced the same breathless run-up that Shopify enjoyed this year — in fact its shares are down 21% over the past 52 weeks and have fallen 35% since the start of 2021.
But with Spotify being the biggest name in music streaming, the company is well positioned to be one of the key players in digital music distribution and should be able to grow its user base as it steadily benefits from long-term network effects.
It might be worth buying on the dip.
Despite Tesla CEO Elon Musk's knack for generating controversy, shares in the electric vehicle manufacturer have fared well over the past year, posting an impressive gain of 81%.
With most countries pledging to be carbon-neutral by 2050, widely available electric vehicles will be critical to meeting those ambitious environmental goals.
But it’s not just electric vehicles that will boost Tesla’s returns. The company also sells highly scalable products like solar panels and batteries, putting it in an ideal position as the clean energy space expands.
Find an investment vehicle that works for you
It’s important to remember that the stock market, as strong as it’s been this year, is not a sure thing.
Needless to say, if your budget already doesn't have room in it, trying to stretch it with stock purchases is not in your best interest.
That said, if you do have a modest investing budget to work with, you may want to use an investing app that allows you to buy “slices” of shares for companies like Tesla — especially one that comes with no fees or commissions.
Another low-budget option is using an app that allows you to invest with just your “spare change” by rounding up to the nearest dollar on all your purchases to help you build a diversified portfolio over time.
For those with a bit more cash to spare, working with a robo-advisor can help you build a portfolio that's compatible with your risk tolerance and grows alongside your financial situation.