5 TSX growth stocks that are turning heads — here’s how Warren Buffett says you can identify more winners

Top growth stocks right now

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Think value

Growth stocks are great, and there are some strong ones out there. But what Warren Buffett mainly looks for is value. Value stocks are those that have strong fundamentals but are trading at a low price relative to their fundamentals; therefore they have the potential for superior growth in the future.

But of course finding those is easier said than done, which is why not everyone on the planet has become as good at it as Warren Buffett. There are some points you can look for when finding these value stocks.

A great place to start is by looking at a company’s fundamentals. For example, if investors look at Obsidian Energy, an oil player, the company is trading at 52-week highs right now. This might not seem like a value stock, but its fundamentals tell a different story. Comparing the company’s stock price to its earnings, we see it is trading at 2.76 times earnings, a very low ratio. In this case, the company is well within value territory.

You can also look at the company’s balance sheet to see whether it holds up as a value stock along with growth. In the case of Obsidian Energy, it continues to increase its annual guidance, with analysts identifying it as a great way to get in on the growth within the oil and gas industry.

But don’t just look at its recent guidance. Buffett has historically taken steps to ensure any company he looks at has a stable path to future growth, Roger Lowenstein writes in his book Warren Buffett: The Making of an American Capitalist.

Identifying undervalued stocks

A stock can be considered undervalued from a number of standpoints. For example, you could look at Lightspeed Commerce today and believe it’s overvalued as it’s up 70 per cent from the market correction on May 12. However, based on where it was back in September 2021, the e-commerce company could also be considered undervalued since the share price dropped from $160 to where it is now, at about $34.50.

Share price only paints part of the picture. What some investors may like about Lightspeed is it’s currently moving towards integrating all its recent acquisitions to jumpstart revenue. Furthermore, they may like the company’s diversified operations. Rather than just focusing on e-commerce, the pandemic ending means its retail and restaurant point-of-sale operations can bring in higher revenue as well.

It’s a great idea to also see what analysts think of stocks before buying into them. In the case of Lightspeed, analysts give it a consensus target price of $60, almost double where it is today. This comes from the company’s path to profitability, according to its fourth quarter earnings report, from recurring revenue, acquisition integration, and in-store shopping.

But what Warren Buffett may not like so much is that there isn’t a long history of growth for the stock. We’ve seen how it reacts to an economic downturn, and it hasn’t been good. So it may take a few more years before investors can confidently buy this tech stock for value and growth.

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Keep your long-term goals at heart

It can be exciting to identify growth stocks you want in your portfolio, but make sure to keep your long-term goals at heart. In fact, investing shouldn’t be exciting. It should be like watching grass grow, paint dry, or any other boring cliché.

That’s not to say you should stay away from growth stocks and opportunities. Instead, a market correction is a great time to identify long-term holds you can feel confident having for a decade or more. You want value stocks that have substantial growth now, and in the future. But the true path to riches lies in buying and holding patiently, as Buffett once explained in a letter to partners.

By combining these strategies and looking at how the company reached this level of growth, the fundamentals that they trade at now, and its future path to long-term profit, investors can certainly identify strong growth stocks. After all, you want a company that can stand on its own two feet, not one run by some once-great CEO.

Because as Warren Buffett also once said — Bill Gates writes in a piece for the Harvard Business Review — “You should invest in a business that even a fool can run, because someday a fool will.”