I’m a big believer in going back and studying past stock trades. It takes some work (and record keeping), but in my experience, the time spent pays you back manifold by identifying new rules and tools for your own trading. And it can shed some light on certain characteristics the fastest growing stocks in the market share. More on that in a minute.
Since I joined Cabot back in 1999, we’ve always reviewed our past trades—it used to be a four-hour meeting with six or seven people at the table, though these days, I do most of the review myself (and usually write about my lessons learned in the last issue of Cabot Growth Investor each year).
When you review your past trades, try to find some “don’ts”—mistakes you made in the last year (and maybe in prior years, too) that you can eliminate from your trading.
For instance, last year, I found was that I was buying too many stocks that weren’t in true uptrends; they might have had nice setups but the overall trends were sideways. And guess what? Most of these stocks continued to move sideways and ended up being losers or small winners, while some other stocks shot up the charts. I’m a much bigger stickler for true uptrends these days.
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But it’s also important that you test some fundamental ideas. What characteristics did your biggest winners have in common? Going back 18 years, I’ve always tested a handful of fundamental criteria against all our trades to see which of them are found most often in our winning trades.
Fastest Growing Stocks and the 100% Mark
And which characteristic has been the most successful predictor of positive stock performance going back many years? Triple-digit sales growth. It sounds simple—and it is. Simply put, many of our largest winners were bought when they were growing sales at 100%-plus rates in the most recent quarter (and, often, for the past few quarters).
Our experience is that companies that have triple-digit sales growth are so rare and they are expanding so rapidly that it’s hard for analysts and money managers to keep up. The quarterly reports usually crush expectations, the size of the market for the firms’ products or services turns out to be much larger than anticipated, and it doesn’t hurt that these stocks usually attract overeager short sellers, who seem to love to bet against fast-growing companies and then have to cover as the stocks move higher.
There are a couple of caveats (aren’t there always?) in using this trait to find the market’s fastest growing stocks. First is that the triple-digit growth needs to be organic, not via acquisitions—growing solely due to a spending spree doesn’t usually cut it. Second, you still need the other growth stock factors in place, too: a great story, some barriers to entry, a positive stock chart and, of course, an overall bull market.
My first big winner when I took over Cabot Growth Investor at the start of 2007 caught my eye because of its triple-digit sales growth—First Solar (FSLR) was purchased in the 50s in March 2007 and we held it until September 2008, making about four times our money!
More recently, my biggest winner this year, Shopify (SHOP), was growing just shy of triple-digit rates (prior four quarters were 99%, 95%, 93% and 89%) when I added the stock to Cabot Growth Investor’s Model Portfolio on January 12. It’s nearly doubled since!
Obviously, not every company growing at triple-digit rates will do as well as these two, and in some environments, it’s difficult to find a single company growing this fast. But when you can add triple-digit growth to the other growth stock criteria, it greatly increases your odds of hitting a home run.
The good news is that I’m seeing a handful of these potential winners today.
One is Exact Sciences (EXAS), which has a potentially revolutionary screening system (called Cologuard) for colon cancer that’s non-invasive and based on DNA technology, using DNA markers from a fecal sample to successfully identify pre- or early-stage colon cancer. The results are very good (Cologuard properly identifies 94% of early-stage colon cancers, 90% of which can be cured), and importantly, the test has a higher compliance rate (42% of people who have used Cologuard have never been tested before!), leading to earlier diagnoses and cures. That’s why sales have risen 123%, 144% and 226% over the past three quarters!
The stock has been choppy—a negative piece by a short-selling outfit hit the stock in mid-May, and then a share offering hit EXAS again in early June—but both times, shares held their 50-day line. And now, the stock is back near its highs. Earnings are due out on July 28 but I’m not opposed to nibbling here.
The Next Big Winner?
And there’s another triple-digit grower that recently came public that’s even more impressive. It’s aiming to revolutionize a gigantic industry—one that totals $710 billion per year! Cabot’s Chief Investment Strategist Tim Lutts just recommended it in Cabot Stock of the Week based on its recent recommendation in Cabot Top Ten Trader.
I think it has enormous potential to become one of the market’s fastest growing stocks, and it’s realizing that potential already, with sales up 118% in the first quarter (and management estimating a 140% gain this year). The stock showed unusual strength for most of June and is now setting up a lower-risk entry point.
If you’re interested, you should give Cabot Stock of the Week a try—not only will you get the full report on this stock, but every week, Tim brings you the best Cabot recommendation based on the current environment, and provides weekly updates (buy/hold/sell) for every stock. He’s hit on a bunch of winners this year and, as the bull market progresses, there’s no doubt more are to come. Click here for more information.