Great Growth Stocks Aren’t Hard to Find If You Know How to Look for Them. Here are 4 Characteristics to Screen For.
Despite a sharp pullback in the last few trading days, the stock market remains strong. When that’s the case, our growth investing experts always get a lot of questions from readers. And aside from queries about individual stocks, the big question is always, “How do you find leading growth stocks?”
The obvious answer is that you take advantage of what Cabot’s growth analysts spend all of our working hours doing. We look for growth stocks with great promise and we advise our subscribers about how to build them into a portfolio.
But the real question for many investors is: “How can I, an individual investor, find leading growth stocks?” These are the people who want to do the work themselves.
So here goes.
How to Find Leading Growth Stocks
A few obvious choices probably don’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 stocks that are rebounding after big losses. And even if a stock trades at 10 or higher, a 20% gain (or more) often (but not always) signals a climax in price action.
It’s also difficult to find stocks with big growth potential by watching the parade of babbling fund managers on financial TV 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.
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.
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. For example, Grubhub (GRUB) was a great story, but one look at what the stock has done over the past two years (-51.7%) is a reality check. Even with a rally from 30 in late March to 68 today, this isn’t a stock that’s going to lead the way.
No, the best way for the individual investor to find great growth stocks is to screen the markets for growth characteristics.
What do you screen for?
4 Screening Tips
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.
I would 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.
Finally, 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?
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 far wrong.
If you need help finding the market’s leading growth stocks, consider taking a risk-free trial subscription to Cabot Top Ten Trader.
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*This post has been updated from an original version, published in 2016.