A key part of being a successful active investor is your ability to unearth investment ideas that will generate alpha: excess return you earn beyond the market index. You can’t generate alpha long-term so it’s better to just invest in the overall market.

How do you find ideas that will make you money, besides the stock ideas you get from financial websites or the “flavour-of-the month” that is constantly mentioned in the news? This article will provide a framework that you can use in order to identify high-growth investment opportunities.

1. Observe macroeconomic trends

Our approach starts at the top – by studying global economic trends. This includes analysing geopolitical tensions and looking at macroeconomic factors, such as GDP. This will give you an indication of the countries most likely to prosper economically in the long-term. This approach requires you to look at the whole picture and consider how economic trends affect industries and businesses within the country. For more data about national economic trends and indicators.

2. Pick an industry

Next, I will analyze specific industries in a country. I prefer to focus on the industries with strong growth trends, and then begin my analysis. It can be difficult to learn everything about an industry. After studying different industries, I recommend that you choose one industry you are already interested in. This will give you a better understanding of the industry and save you time. This industry should also have high growth potential.

Three main criteria are used to determine if an industry is viable:

  • GrowthThere are two types of industries: sunrise and sunset. Most industries fall somewhere in the middle. A sunrise industry has greater potential for growth than a sunset one. As countries seek to reduce carbon emissions, many countries are gradually phasing out coal mining. Therefore, the coal mining industry is not likely to provide significant future growth. However,Green technology is expected to increase.At a CAGR rate of 27.1%, it will increase from US$8.7 to US$28.9 by 2024.
  • Non-cyclicalThis ensures that the industry is protected from seasonality and a decrease in consumer spending. Tourism, for example, is the most vulnerable industry to a recession. This is because consumers are less likely to travel and spend more. Therefore, a potential recession could have a significant impact on tourism businesses.
  • ProfitabilityBecause of its low profitability, the aviation industry is one industry I would avoid. This is not a strict rule.AllAvoid unprofitable businesses. Many of the fastest-growing tech companies were initially unprofitable. Investors had the expectation that these companies would generate greater profits in the future. Amazon, for example, was not profitable or had very low profits for a long time. The company was simply too small.reinvesting for future growthTo dominate the ecommerce market, Amazon built its distribution network, warehouses and data centers. Amazon’s profits really began to rise in 2016, more than 20 years after its founding. Amazon now makes more than US$10 billion annually.

3. Break down the industry

Once I have decided on an industry, I like to break it down into smaller supply chains so I can understand the industry better. I also gain deeper insight into potential business opportunities within each industry segment.

The most important step to identifying potential companies is breaking down an industry into its segments. This will give you insight into companies that are market leaders within their respective segments and also show companies with significant market power in a niche market.

To begin with, I look at the final product being sold on the market. Then, I look at the entire product chain from this point. I look backwards to identify the various segments that produce the labour and materials for the final product.

  • Which other businesses do the manufacturers of end products work with?
  • What is the process of obtaining raw materials?
  • What happens when the different materials are combined to create the final product?

This allows me map each stage of the supply chain that a company contributes to the creation of the final product.

Then, I look forward to the product chain.

  • Which marketing channels are you using?
  • How are the products distributed to customers?
  • This helps me to identify the way the product is sold.

Let’s take a look at the automotive industry to illustrate this point. The car is the end product. There are many stages in the supply chain where companies can come in. There are many companies involved in the production of unique parts of the vehicle, including the windshields, lights, and wheel rims.

4. Identify growth trends and segment leaders

Once you have broken down each value chain segment within an industry, it is time to determine which segments are fastest growing. Although an industry can grow, not all segments will experience the same growth rate. This will help you choose a company that can benefit from these growth trends.

You can list a few companies that are active in high-growth sectors of the industry. Consider whether the company is a market leader within that sector. If the company also straddles across multiple parts of a supply chain, this could potentially mean that the company has significant supply chain power and strong vertical integration. You can also examine the businesses within each segment and identify their business models and strengths and weaknesses by studying them in detail.

Another question I enjoy thinking about is “What is the unique problem the company solves within this market?” For example, if the company has a new product that improves production processes, it could be a niche market previously unexplored. This is how many fast-growing companies have found success. They are able to improve upon an inefficiency and open up new markets for their products.

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