Why I Avoid 90% of ‘Growth’ Stocks (And How to Spot the Rare 10x Winners)

I see a lot of people chasing growth stocks. The problem is that most of these stocks are not good investments. They get a lot of attention, their prices shoot up, and then they often crash, leaving people with big losses.

This is a common pattern. That’s why I'm very careful. My belief is that 90% of companies called "growth stocks" should be avoided. My whole investment process is about filtering out that 90% to find the few that have real potential.

Why Do Most Growth Stocks Fail?

Many growth stocks fail because they are built on a weak foundation. They might have a good story but not a good business. They get popular, often pushed on social media, but they don't have the sales or profits to back up the high stock price. When the excitement fades, the stock price usually falls. It’s a tough lesson many investors learn.

For example, we saw this play out with many SPACs in 2021 that promised the world but never had the numbers to back it up.

What Are the Red Flags of a Bad Growth Stock?

To protect your money, you need to know what to look for. Here are the common warning signs I see in weak growth companies.

1. No Competitive Moat

A moat is what protects a company from competition. If a business doesn't have one, it's hard to succeed long-term. Think of all the meal-kit delivery companies that started a few years ago. It was a crowded market. They had to spend a lot of money on ads to get customers, and it was easy for customers to switch. This leads to price wars, which hurts everyone.

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2. A Business Running on Hype

Some stocks are famous just for being famous. Their price goes up because people are talking about them online, not because the business is doing well. We saw a lot of this with the SPAC bubble. A good story is not enough.
For a deeper look at avoiding hype-driven stocks, see my piece on Cadeler (CDLR): A Real 10x Stock?.

3. Dangerous Financials and High Cash Burn

It’s okay for a new company to lose money. But you have to see a clear path for it to become profitable one day. A major red flag is when a company is burning through cash very quickly. Look at their financials.

• If their gross margins are low, it means they don't make much profit on what they sell (why gross margin is the #1 metric).
• If they have less than 12 months of cash left, that’s another warning. It means they'll likely have to sell more stock, which lowers the value of your shares.

4. "Me-Too" Products with No Real Innovation

Some companies are just copycats. They make a slightly different version of something that already exists. True 10x growth comes from companies that create something new or change an industry. After Tesla’s success, many new EV companies appeared. But a lot of them didn't have the unique technology or infrastructure to compete. They were followers, not leaders.

What Are the Signs of a Good Growth Stock?

After you learn to spot the bad companies, you can focus on finding the good ones. Here are the three things I always look for.

1. A Deep and Defensible Moat

This is the most important factor for me. A real moat is an advantage that's very hard for others to copy. For example, ASML is the only company in the world that makes the specific machines needed to produce the world's most advanced computer chips. This control over a vital technology gives them a powerful, long-lasting moat.

If you want to see another real-world moat story, check out Palantir’s long-term growth case.

2. A Clear Reason for Growth Right Now

A big market is interesting... but you need to ask, "why is this company going to grow fast right now?" This is about timing.

Look at NVIDIA. They made gaming chips for years. But the recent explosion in AI created huge demand for their products. You can see this in their revenue. Their data center sales grew from around $3 billion a quarter to over $18 billion in about a year. They were ready for a major market shift.

For a similar timing-based setup, read my breakdown of Grab (GRAB): A Fintech with 10x Potential.

3. Invested Leadership with Skin in the Game

You are betting on the people running the company. I look for founders and CEOs who own a lot of the company's stock. This is called insider ownership. When a leader owns a significant stake, their goals are aligned with other shareholders. They want the stock to go up over the long term because it's their money, too. They aren't just thinking about their next paycheck.

How to Do Your Own Stock Due Diligence

This isn't just a theory. You can use these ideas to check any stock you're interested in. Here are a few simple steps to start:

1. Read the latest earnings reports. See what the CEO says about the business. Do they sound realistic and honest?
2. Understand the competition. Who are their main competitors? What makes this company different?
3. Check insider ownership. You can find this information for free on many finance websites. Is management buying or selling their own stock?
4. Look at the financials. You don't have to be an expert. Just check the revenue growth, gross margins, and how much cash they have.

🔑 Want my full framework? Download my 10x Stock Checklist: My Exact 47-Point Analysis Framework — the same system I use to separate hype from real opportunities.

Final Thoughts

Finding great growth stocks takes discipline. It means saying no to most of the opportunities you see. But focusing on quality is how you can find the companies that build real, long-term value.

If you want to dive deeper into evaluating growth and income tradeoffs, I also wrote about Oscar Health’s growth story.

And don’t forget — you can grab my 10x Stock Checklist: My Exact 47-Point Analysis Framework to analyze any stock with confidence.