Aside from queries about individual stocks, the biggest question we get from subscribers is always, “How do you find growth stocks?” It’s a great question because if you’re not an experienced growth investor, finding high-potential growth stocks can be risky business.
The obvious answer is that you take advantage of what we growth analysts spend all of our working hours doing. We look for growth stocks with great potential and we at Cabot advise our subscribers on how to build them into a portfolio.
But the real question for many investors is: “How can I, an individual investor, start finding growth stocks worth investing in?” These are the people who want to do the work themselves.
So here goes.
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Where You Shouldn’t Start Finding Growth Stocks
A few obvious choices probably won’t work.
For instance, you probably won’t find great growth stocks by scanning the lists of the day’s biggest gainers. All too often, the stocks making the biggest leaps during the day are low-priced issues that are rebounding after big losses.
It’s also difficult to start finding stocks with big growth potential by watching the parade of babbling fund managers on financial cable shows. In the first place, most big fund managers apply a valuation approach to select stocks, so their recommendations focus on cheap stocks, rather than those with a chance at rapid price appreciation. Plus, they’re probably using their recommendations to boost the stocks in their portfolios.
Financial blogs and columnists on financial sites are fun and fascinating, but they’re too hit-or-miss to use as guidance in putting your hard-earned money to work. Plus, there’s no follow-up or advice on how to handle the recommended stocks.
And lastly, it’s probably a mistake to look at the stocks that led the last big rally or those that dominate headlines on financial sites. If everyone else is reading about it, you know you’re not early—and you may just be late.
How to Start Finding Growth Stocks With Promise
No, the best way for the individual investor to start finding growth stocks is to screen the markets for growth characteristics. Stock screening technology is available for free from just about any financial website, including Yahoo Finance, Google Finance or the website of your own online broker.
The Wilshire 5000 Index was established in 1974 to track the value of every stock on the market that represents a firm headquartered in the United States and that trades on U.S. exchanges and has widely available pricing information. The market grew to a high of over 7,500 stocks in 1998, but has now shrunk to just over 3,400, but that’s still a lot of choices.
So your job is to pick out 50 stock candidates from among those 3,400 for further study and analysis.
What Do You Screen For?
When finding growth stocks, your most important screen is for price appreciation. You should set your screening characteristics to show you stocks that have risen 20% or more during the previous month. This will eliminate stocks that are losing value, ones that are trading in a range and ones that are appreciating only gradually.
If you only have one screen, that’s the one you would use. The most bullish thing a stock can do is to go up in price. Price appreciation represents an improving opinion of the stock on the part of the investing community. And by keeping your time period at a month, you will exclude the one-day flash-in-the-pan stocks that hatch and die like mayflies.
If the markets are in good health, you will need more screens to whittle down your list. For novice investors, we suggest setting your screens to eliminate any stocks under $10. Low-priced stocks are just too volatile.
Also, look for stocks that trade with adequate trading volume to ensure that you can buy and sell easily. Your liquidity screen should exclude stocks that trade fewer than 300,000 shares a day.
Once your list becomes manageable, you can begin to look for the fundamentals that support price appreciation. These supporting numbers include revenue and earnings growth (both quarterly and over the years), institutional sponsorship, and after-tax profit margins.
Lastly, you will want to begin researching the business propositions of the companies you have selected. Are their products and services innovative, revolutionary, and with potential appeal to a huge mass market? Are they the best in their industry? Is management seasoned, responsive, and able to juggle the rise and fall of costs, demand, and competition? Are there barriers to keep competition at bay?
Are You Finding Growth Stocks That Are Currently Going Up?
You need to consider everything before you put your money down. But the place to start is stock price appreciation. The market is constantly processing all of the information we’ve talked about here, and the movement of a stock’s price is like a running tabulation of the results. Start with stocks that are going up and you won’t go wrong.
If you would like expert help finding the market’s leading growth stocks, consider taking a risk-free trial subscription to Cabot Top Ten Trader. Top Ten comes out every Monday with a thorough analysis of the 10 strongest stocks of the previous week, using many of the screens I’ve outlined here. With concise summaries of each company’s market proposition, the performance of its chart, and the fundamentals of revenue and earnings, Top Ten makes identifying the top stocks in the market a breeze. Plus, there’s a follow-up on every stock that falls into the recommended buy range.
Click here to join.
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*This post is periodically updated to reflect market conditions.
